The interest that the United States Treasury pays on the 30-year bonds it sells to finance deficit spending has been higher this week than it’s been since last summer.
The rate on the 30-year bonds briefly cracked 5% on Monday, then spent the rest of the day hovering just below that level. That’s the bond market sending a message that the economy has changed.
A 5% rate on the 30-year Treasury is more of a psychological threshold than a five-alarm fire, said Frank Warnock, a professor of business administration at the University of Virginia.
“I think more significant would be if we spend time north of 5% — if it breaks through and starts to be 5.5%,” he said.
Still, even a short stint at 5% comes with real-life consequences, especially since the 10-year Treasury yield is also hovering around a high for the year. Higher yields mean higher borrowing costs.
“30-year mortgage rates, for example, or 15-year mortgage rates or car loan rates,” Warnock said.
What a 5% yield on the longest term government bond says about the economy is that investors are worried about the war and oil supply and how they will affect prices, said Adam Abbas, head of fixed income at Harris | Oakmark.
“I think the 30-year is really about, you know, structural inflation expectations — are they kind of more entrenched?” he said.
There has been a series of one-off inflationary events — a pandemic, tariffs, and a war. Now, they’re blurring together to make high inflation feel like a fact of life. The bond market is betting the Federal Reserve agrees and will keep interest rates high, or even raise them.
Winnie Cisar, global head of strategy at CreditSights, said investors also worry about the deficit.
“The government spends more than it takes in, which means it needs to plug that gap somehow,” she said. “And that gap is plugged with debt.”
That debt takes the form of bonds. Cisar said the rate on long-term bonds has been headed upward since around 2020, after spending decades before that trending downward.
“I think a lot of people are trying to figure out [if] there something structurally different in the economy that should argue for elevated 30-year Treasury yields on a sustained basis,” Cisar said.
The signal the bond market might be sending is that the economy has fundamental differences.