10-year Treasury yield rises to 5%, highest level for the key rate in 16 years

Officials sadly have realized that they have a solution to everything: inflation.

What is really hilarious is that it's officially to "combat inflation" but their only way out is inflation because they're never ever repaying that debt.

> cease to pretend that the US currency is a stable trading platform

It is toilet paper. But so is the EUR / JPY / etc.

Wealth is anything that is not that toilet paper.

Doesn't that assume we are currently sitting at the optimal point of the curve? Is there any reason to think that is the case?

[0] https://en.m.wikipedia.org/wiki/Kansas_experiment

...or we just change the price of a dollar. It's good to be the king.

https://en.wikipedia.org/wiki/Modern_monetary_theory#Governm...

I would imagine your 5% number has to assume some baseline of inflation and that 5% would increase as inflation increases beyond said baseline.

A key thing to note here is that the US government typically holds shorter term notes which have much lower yields than their 10y counterpart.

Everyone has an opinion on the optimal part of the Laffer curve.

Evidence may even exist for some of these claims, but we've all got an obvious clear incentive to want lower taxes today while downplaying the long-term risks of the government failing to invest in the future, so I tend to assume we can sustain higher taxes more easily than the loudest voices[0] tell me.

[0] Unless those voices are literally, non-pejoratively, Communists; but even then that's not because they're wrong about the Laffer curve itself, but that the people still promoting Communism today tend to also gloss over all the other mistakes made by the historical examples thereof…

American politicians, deliberately or out of incompetence, use the crisis of the moment and conveniently forego this topic.

I’m convinced the next US administration HAS to do something about this. I don’t see a way that doesn’t involve both spending cuts and raising taxes.

I don’t like discussing politics on HN, but I think this should be deeply concerning for anyone interested in start ups, technology, or innovation. All of our innovation is enabled by having a somewhat functioning democracy, courts, cops, civic culture, where people have the opportunity to critically think about hard problems and innovate, because they’re not worried so much about near term survival.

Equity can evaporate -- unlikely US T will though the politicians certainly are trying.

Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!

And stocks in rising interest rates environment only average 6.4% a year, not 8%. Here's a study over 13 periods where interest rates rose in the US since 1962 to 2020:

https://www.lpl.com/newsroom/read/weekly-market-commentary-r...

So, indeed, many are now simply doing this: selling (or pausing their buy/DCA) stocks and taking the guaranteed yield.

I typically considered USD/EUR toilet paper but at 5.6% short term I'm now putting some of my money in short term treasuries. And I'm DCA'ing the proceed into stocks.

> This will probably drive the market down much further than it has in 2022.

I remember my family (in the EU) getting 13%+ interest rates on government bonds when I was a kid.

We're "only" at 5.6%: rates have and could again go much higher.

As bond rates increased, companies went bankrupt because they couldn't afford loans needed to sustain themselves. When the US Government is willing to pay 10%, 15%, or more on debt, that means that "normies" will have to pay 20% or 25% on mortgages or company credit.

Companies who are used to 8% debt or normal people used to 5% mortgages will suddenly find 15% mortgages or 20%+ debt impossible to manage and go bankrupt. This cascades and hampers the economy.

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Everyone complains about US Government debt while ignoring the fact that most people and companies are levered up the wazoo. You think US Government is bad? How much money is typical Silicon Valley company making, and how much is their debt load?

Will (random-unicorn) be able to survive higher interest rates? Even the fear of others going bankrupt will cause banks to hoard money for themselves (too risky to lend it out to others), especially because cash now earns 5% to 6% safely. Why lend to risky companies who'll just go bankrupt when you can lend to US Government more safely?

[1] https://www.investopedia.com/terms/c/capm.asp

It also should be mentioned that 5% is actually just above inflation so that yield is nominal and not actual returns. Inflation (Assuming at 3.7% going forward) that 5% is more like 1.3% real return on money.

Worth reminding though the stock market IS NOT the economy.

The problem is that we don't know if it will happen with short-term rates dropping, or if long-term rates increasing (or which combination thereof).

If short-term rates remain 5.5%+ like they are today, the yield-curve could normalize with 10Y being at 7% or higher, meaning today's 10Y at 5% would be a bad buy.

Alternatively, if short-term rates drop to 3% and thus 10Y declines to 4.5% (but still normalizes), then buying 10Y at 5% today would be a good idea and better than buying a 10Y later.

Or in other terms: a $1 Billion company should be making $0.05 Billion (or $50 Million/year) in profits to be comparable to a 10Y bond at 5%. Except... everyone accepts the fact that bonds from the US Treasury (the entity that can literally print US Dollars) is lower-risk than equity from a company. (Equity is junior: if companies go bankrupt they pay their debts first and equity secondly). So you "should" be making more money from equity than bonds/debt for it to make any amount of sense.

Companies will have to change their PE ratios to compete in theory. The easiest way to do this is to... lose valuation. You can't just control profits so easily, so instead of being a $1 Billion company making $50 Million/year, it'd be easier to turn into a $0.5 Billion company making $50 Million/year (now a PE Ratio of 10, or clearly better than Bonds)

Or so the theory of value-investing goes. Which... doesn't really work out in reality but hopefully you get the gist.

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Note that dividends are meaningless from this perspective. Profits are what matters. Companies take profits an invest into themselves, so it doesn't matter if the profits are emitted as dividends (ie: $50 Million returned to the shareholders in a dividend per year), or if the company buys a new $50 million factory each year. Either way, its "the shareholders property" and therefore equivalent.

If the company buys a $50 million factory each year, then in theory, they've grown by $50 million bucks. Ex: the $1 Billion company is now a $1.05 Billion company, and are expected to make $52 Million next year. After all, the "bondholder" could have spent their 5% coupon on buying more bonds, so to be "equivalent" to the risk-free bond strategy, the company also has to grow exponentially.

IE: Everything in the market is now encouraged to grow at 5% (or faster), just to keep up with "risk free government debt".

VCs are not getting funds from LPs who all would much rather invest in US government treasuries for the easy 5%.

Public stocks are often bought with margin money (which is leverage, aka debt). Now, margin money lenders are charging a higher interest rate on that margin, causing borrowers of margin money to not borrow as much. Thus, stocks are not being bid up as much, causing stock prices to drop.

Mortgage rates track the 10-year Treasury yield and thus mortgage loan rates are going higher and higher. Housing market is expected to sag, if not go into a correction or a crash.

For the average person, the only parts that are affected are:

1. If their employer is dependent on cheap money (real estate, VC tech, growth stocks) these employers will either need to innovate HARD or start laying off people under pressure from investors.

2. If you were looking to borrow money for some reason (say, a house or a car), you are looking at insane interest rates.

But all of this happens in any interest rate rise. What is interesting about this particular threshold of 5% is that the world hasn't seen US treasury rates at this level since the last great recession. Most companies, stock holders, people in general don't know how to evaluate this new world of a higher rate. Should you buy that car you desperately need? Is relocation for an RTO job even possible?

Higher interest rates, lower investment rates can have a devastating impact on people's lives.

US Treasury Bonds are considered the risk-free rate.

If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. You'd buy a Treasury bond instead to get 5% risk-free. As a consequence, stock prices should drop until yields + premium to take on risk exceeds the risk-free rate.

It's clearly not sustainable to be growing the national debt at 2 or 3 trillion per year, and especially not at 5% interest rates. People bring up Japan as some sort of model that GDP/Debt can go much higher than the US is currently at, while missing that Japan is paying 0.76% on the 10-yr notes today. In many ways, Japan is lucky that their economy is so tepid and impotent because if they had caught the inflation bug like the US, they would have had to raise rates significantly.

Needless to say, debt levels at 270% of GDP with 5% rates would cause a fiscal catastrophe in Japan. Their interest payments alone would exceed all government revenue. They would have to cut 100% of government services (military, medical, pensions, administration, legislation, the courts) AND raise taxes, or issue mountains of new debt in some sort of horrible debt spiral until there was no more demand for yen bonds, at which point there would be sovereign bankruptcy I suppose? IMF bailout of Japan?

At current rates, US government debt will hit $41 trillion this time next year. It grew $604 billion in the last thirty days, and every bond sold is at 5% interest or more. It's just not something that can be done forever unless the US economy starts growing 10-15% per year, or unless rates can be pushed down to 0% indefinitely with no negative consequences.

One thing is for sure, your current tax rate you are paying is as low as it will be for the rest of your lifetime.

This video by Ray Dalio explains it much better than I ever could:

https://www.youtube.com/watch?v=PHe0bXAIuk0

As a consequence, "what is the solution?" will get sidelined by the question of "should we even solve anything?", even though high interest rates are clearly damaging.

On the actual question of how to solve it, I don't have any answer. Both austerity and inflation come with side-effects that may or may not increase that rate even more.

Invest $6,140 at 3.0% (2% inflation) compounding for 10 years = $8,269.69

Invest $6,140 at 2.5% (2.5% inflation) compounding for 10 years = $7,871.71

Invest $6,140 at 2.0% (3% inflation) compounding for 10 years = $7,491.97