Has this ever happened to you? One time, my gym was like, “Hey, would you like to prepay your membership for two years in advance?” And I was like, “Uh, no, why would I do that?” And they were like, “Well, we’ll give you a discount.” And I was like, “Better be one heck of a discount, ‘cause what if you shut down?”
So I didn’t do it. Lo and behold, the gym went bankrupt a year later.
Thirty-year Treasury bonds are kind of like my shady old gym. Not the shadiness or the bankruptcy — but the fact they ask you to lock up your money for a long time.
“You tie yourself up for 30 years, you’re locked in,” explained Stephen Laipply, global co-head of Bond ETFs at Blackrock. “And so you’re going to potentially demand a premium to take that risk.”
A few weeks ago, the yield on the 30-year T-bill hit 5%, which it has done only a few times in the last decade. This time, though, it’s stayed above 5% — for about two weeks so far.
It’s the longest stretch over 5% the 30-year bond has had since 2007. What’s the bond market trying to tell us?
So much can go wrong in 30 years, and investors want to get paid more for that risk. Recently, they want to get paid extra more.
“Yields have been rising and that’s a signal that markets are becoming uncomfortable,” said Ian Shepherdson, chairman of Pantheon Macroeconomics. “First is the intractibility of the huge budget deficit that the U.S. has been running for some time.”
Government debt hit 100% of GDP in March. People are starting to wonder if they’ll get paid back in 30 years.
“There’s no plausible, credible plan to reduce that anytime soon,” Shepherdson said.
While investors have been worrying about the U.S. government, they’ve also discovered they have alternatives. Again Stephen Laipply at Blackrock.
“All of a sudden, you have this very large issuance boom in AI that’s necessary to build out infrastructure. This is all happening at the exact same time,” said Laipply at Blackrock.
Tech companies are offering high-paying, long-term bonds of their own that are competing with the government’s.
“Pension funds, insurance companies, asset liabilities management — they love these yields that we’re seeing,” said Leslie Falconio, head of fixed income strategy at UBS Wealth Management.
So long-term investors have worries and they have options. As a result, they’re demanding higher yields.
Thirty-year yields don’t influence mortgages or car loans the way 10-year yields do. But the thing about the long term is after a while, it becomes the now. And so may higher rates.