Please, folks, let’s not start panicking about long-term Treasury bond yields. In the last couple of weeks I’ve seen more ink spilled about the 30-year Treasury than I have in probably the last 10 years.
The bellwether Treasury is the 10-year, which has been trading steadily in a range of 4 percent to 5 percent and no one’s been screaming about that.
Yet here’s the key point. The 30-year Treasury bond yield has gone up about 35 basis points in recent weeks almost entirely because of plenty of new economic statistics that show a faster, more powerful growth rate — especially in manufacturing and construction, along with advanced technologies.
It’s not about inflation. Yet the news headlines have been screaming inflation with no good analysis because they just love to keep whacking away at President Trump.
Take a look at any of the Treasury rate increases, however, and you will see it’s all from the real yield, not the inflation component.
The inflation component, which is the CPI breakeven compensation for inflation, hasn’t gone up all year. On the 30-year CPI breakeven, the expected inflation component has hovered just above 2.0 percent all year to date.
Another example, the market rate for 10-year Treasuries has increased about 50 basis points so far this year.
And virtually all of it is from an increase in the real yield from Treasury Inflation-Protected Securities of 50 basis points. The expected inflation rate from the breakevens has increased by less than 5 basis points.
The consumer price index break-even component that implies inflation has basically been flat. The same is true for the 30-year Treasury bond.
What is happening however, is that market rates have been driven up by stronger 4 percent-type economic growth and are normalizing after all those 0-type rates from the financial crisis and Covid and very bad Federal Reserve policy that Kevin Warsh is going to fix.
Actually, for context, a 4 percent-plus Treasury yield is more like the President Clinton/Speaker Newt Gingrich days of strong growth from lower capital gains taxes and welfare reform.
The economy was booming then. The Treasury rate’s around 6 percent. So right now, we’re just normalizing. And there is an enormous boom. Mr. Trump today at the White House spoke of the boom from one big beautiful bill:
“We’ve gained so much in the last 16 months like nobody can believe, actually. And not only that, but we have more money being invested in the United States than any country at any time in history. Money is coming in by the trillions.”
He added that “our nation’s economic dominance drives trillions of dollars in investments, creates millions of jobs, and expands access, credit and capital so that every citizen has a chance to achieve what we now hear a lot about the American dream.”
The American dream is alive and well. So I’ll just put a cap on this by saying, first of all, ignore the headlines. Second of all, interest rates in the bond market are not exploding.
And what increase there has been is because of a stronger than expected economy. And we are normalizing. And there’s nothing to panic over, even though the press loves to whack away at Mr. Trump on almost every topic under the sun.
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