Why Every Trader on Earth is Watching the 10-Year Treasury Now with Nick Colas

**Josh Brown** (0:13)
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Well, well, well, here we are again.
How are we doing, Nick?

**Nick Colas** (1:34)
Very good, how are you?

**Josh Brown** (1:35)
Good, let me introduce the show real quick and we'll get down to business. Ladies and gentlemen, welcome to an all new edition of What Did We Learn?
On today's show, we're doing, I think, the most important topic of the past week. For investors, allocators, portfolio managers, hedge funds, this is the thing that everyone's looking at now that we are most of the way through earnings season and we're very fortunate. I have my friend Nick Colas here.
Nick, along with his co-founder, Jessica Rabe, who is on the bench today for today's episode, not feeling great, but Nick is here. Nick is the co-founder of DataTrek Research and the author of DataTrek's Morning Briefing Newsletter, which goes out daily to 1,500 plus institutional and retail clients. Nick and Jessica also have their own awesome YouTube channel. You could find a link to it in the description below. Welcome back, Nick. It's so great to see you.

**Nick Colas** (2:32)
Great to see you.

**Josh Brown** (2:33)
All right. You having a good summer?

**Nick Colas** (2:35)
Very good. How about you?

**Josh Brown** (2:37)
This is a really good one for me too. So I say this every year.
This is the part of the summer where it's almost over, but you almost say to yourself, thank God, I'm having too much fun. I actually need to get back to work. So this is like that week for me usually.
But we're here regardless. So I want to do this.
I want to open this segment by just saying, typically we talk about the stock market. Typically, what happens in the bond market doesn't really have much of an impact on the stock market or the sentiment in the stock market, because people just understand it's two different markets. Sometimes, they fluctuate for the same reason. Sometimes, they are doing their own thing independent of each other. However, right now, the Treasury bond market has come back. It's the front burner of the market conversation because we're seeing some volatility there. We're seeing a lot of narratives being kicked around about what's causing it. And I think it's a great way for us to open up the conversation today. So Nick, you're talking about long-term Treasury yields specifically moving higher. So let us know what we need to know.

**Nick Colas** (3:48)
Sure.
I'm focusing right now on the 30-year Treasury because that's gotten a lot of the press. It has broken out to plus 15, maybe 20-year highs in terms of yield. And there's a lot of confusion of what's causing that. So I pulled together a chart that we can start talking about. And this shows you 30-year Treasury yields decomposed into inflation expectations, and then the residual, which is called real interest rates. The nominal rates that you see on the screen, the 5.2%, 5.3%, can be broken down into how much inflation investors expect over the next 30 years per year, and then whatever's left over is called the real yield. The red line, which is inflation expectations, has been dead flat pretty much for the last 15, 16 years. This chart goes back to 2010 And it goes between, you call it 1.5% and 2%.
It is a 2.5%. It is very stable. The market always knows inflation is coming, and it's very stable. Those expectations are very stable. What moves around a ton, meaning a ton, is real rates, what you have left over after inflation expectations. And they're the ones that have broken out. So instead of being, call it 2%, 2.5%, they're not pushing up on 3% in the current environment. And that's the reason for rates being higher. And it's super important, if we just throw the chart back up for one more second. If you were an investor in TLT, which is a very popular long dated treasury bond ETF out of iShares, you compounded at almost 8% a year positive through the 2010s. It was a very good money making investment. In the 2020s, because real rates have exploded from being negative to being very positive, your CAGR, your compounded annual growth rate over this decade so far has been negative 4.4%.