Are Rising Bond Yields Much Ado About Nothing?

• Rising bond yields are panicking bond markets, despite the fact that 10-year Treasury yields are still significantly below long-term averages.
• Monetary policy since 2008 has suppressed interest rates, helping fuel cheap debt and lower yields, despite rising budget deficits and a growing national debt.
• As markets begin to reprice sovereign debt risk, it’s worth considering whether safe haven assets like physical gold offer a useful counterpoint to conventional financial assets.

Financial markets panicked in recent weeks as bond yields on long-dated Treasury debt surged to levels that haven’t been seen in decades. In response, the US Treasury announced that it was doubling the size of its bond buybacks.

So what were these high bond yields that brought so much concern to financial markets? If you’re old enough to remember double digit interest rates in the early 1980s, you might think that interest rates of 12%, 15%, or higher would be cause for concern.

But no, interest rates on 10-year bonds reached over 5%. Yes, that’s right, 5% per year.

That used to be a decent interest rate on a bank savings account, at least 30 years ago. But good luck finding a savings account that pays that kind of interest today.

We’ve become so accustomed to low interest rates since the 2008 financial crisis that 5% seems, at least to financial markets, to be incredibly high and a massive financial burden on the economy. But is this panic over reaching the 5% mark much ado about nothing?

A Tale of Two Governments

Let’s look at two governments from the perspective of a typical government bond buyer.

Financial Metric	Government A	Government B
National Debt (total)	$5.63 trillion	$40.1 trillion
Debt Held by Public (% of GDP)	33.3%	98.7%
Projected 10-Year Debt Growth (Debt held by public)	-39%	75%
Projected 10-Year Debt Level (% of GDP, debt held by public)	22.2%	120.2%
Annual Deficit (total)	$236.2 billion surplus	$1.85 trillion
Annual Deficit (% of GDP)	0.9% surplus	2.6%
10-Year Nominal Government Bond Yield	5.80%	5.13%

 

Looking at those two governments, doesn’t it seem like Government A is more fiscally responsible? Government A is actively working towards budget surpluses and is expected to pay down its debt, while Government B is expected to keep growing its debt.

If you’re looking to buy government bonds, wouldn’t you assess Government A as the more likely to pay back those bonds?

If that’s the case, then why are markets demanding a higher interest rate from the more fiscally responsible Government A than from the fiscally profligate Government B? To answer that question, we’ll have to take a dive into history.

Bond Rates Compared Historically

Part of the reason the 5% mark feels so high today is because the US government currently holds a national debt of over $40 trillion, and interest expense alone on that debt are projected to run $1.04 trillion in FY 2026. Therefore the higher bond yields rise, the more interest the government has to pay on debt issuance.

Looking back about a quarter century we see that there was a time when the US government was actually running budget surpluses, in fiscal years 2000 and 2001. There was even talk about the US government being able to pay down the entire national debt, and questions as to how the Federal Reserve might be able to engage in monetary policy if there were no Treasury debt to buy and sell through open market operations.

That was back when the Republicans who controlled Congress talked tough about fiscal responsibility and cutting spending, and actually meant it. So what were interest rates like back then?

If you haven’t already figured it out, look at the table above. Yes, Government A was the US government in the fall of 2000, and Government B is the US government today.

A quarter century ago, markets demanded that a somewhat fiscally responsible federal government pay 5.80% in interest in order for them to purchase that debt. Yet today, facing a $40 trillion debt that may never be paid off due to nearly $2 trillion annual budget deficits, markets are only demanding a little over 5%.

And that’s supposed to make us panic?

How is it that a government that has demonstrated itself to be a poor fiscal steward and that has more than doubled the national debt since 2020 is able to still finance long-term debt at only 5%? Why aren’t markets demanding 10%, 15%, or more for accommodating the US government’s continued issuance of trillions of dollars of new debt each year?

The Federal Reserve’s Thumb on the Scale

The answer to those questions is very likely the fact that central banks around the world have kept interest rates low ever since the 2008 financial crisis, and an entire generation of bankers, traders, and policymakers has come of age during this period of unusually low interest rates.

When you look at the history of the federal funds rate from the earliest available data in 1954 until 2008, the average federal funds rate was 5.69%. Yet from 2008 to today the average federal funds rate has been 1.46%.

Data for the 10-year Treasury only goes back to 1962, but the average daily yield from 1962 to 2008 was 7.04%. From 2008 to today the daily average yield has been 2.77%.

The difference between the previous long-term and post-2008 federal funds rate averages is 423 basis points, while the difference on 10-year yields is 427 basis points, a nearly exact difference.

That’s indicative of the power the Federal Reserve has in influencing long-term bond yields through its conduct of monetary policy. It’s also an indicator that bond yields today are significantly below long-term norms.

Is it any wonder then that in an era in which bond yields are over 4 percentage points lower than the long-term average that we live in a world awash in debt? That the government has racked up over $40 trillion in debt? That households and corporations are more indebted than ever?

The takeaway from bond yields rising above 5% isn’t that bond yields are rising to insanely high levels. It’s that markets are finally waking up to the growing risk of holding bonds issued by heavily indebted governments, and are starting to reprice that risk accordingly.

Helping Safeguard Your Retirement: The Case for Physical Gold

Soaring debt and rising bond yields could be undermining confidence in the soundness of government debt. This isn’t just happening in the US, sovereign bond yields around the world have been rising recently.

Growing government debt, high oil prices, and persistent inflation have combined to create a perfect storm that is impacting financial markets. And in response to that, many people have been looking for safety in safe haven assets like gold.

Adding physical gold to portfolios has always been a popular strategy to diversify asset holdings and help protect purchasing power against inflation and currency devaluation.

Help Defend Your Assets With a Gold IRA

One popular way to help protect your retirement savings is through starting a gold IRA. A gold IRA is a self-directed IRA that allows you to hold physical gold coins and gold bars in a retirement account while still enjoying all the same tax advantages as a conventional IRA.

A gold IRA can be funded with a tax-free rollover from an existing 401(k), 403(b), TSP, IRA, or similar retirement account into your gold IRA. And when you decide to take a distribution, you can take that distribution either in cash or in physical gold.

Why Now Is the Time to Buy Gold

Gold has served as a proven safe haven asset and a reliable store of value for centuries. During periods of economic turmoil and high inflation, gold has historically demonstrated strong asset growth while paper currencies lose purchasing power.

With the US national debt having reached above $40 trillion, and market volatility increasing, now may be the time to start thinking about how to help protect your nest egg before things get out of hand.

If you want to help safeguard your financial future against economic uncertainty, contact the precious metals specialists at Goldco today to learn how easy it is to make physical gold a part of your retirement planning.