by Jason Norris
Director
Equity Research and Portfolio Management
Over the last few weeks investors have put upward pressure on bond yields for a variety of reasons. First, the U.S. treasury lost its last AAA rating when Moody’s downgraded United States debt to AA. Previously, the S&P 500 downgraded U.S. debt in 2011 and Fitch Ratings downgraded in 2023. Typically, these downgrades lag the market, as investors have already “sniffed out” the potential long-term risk to the bonds. This week, however, we also saw the passage of the Republican house tax bill, which is expected to increase the federal debt by roughly $3 trillion. Finally, the treasury had an auction for $16 billion in 20-year bonds on Wednesday, which had weak demand. These events, coupled with continued tariff uncertainty, have resulted in an increase in interest rates in the last month and a half. The 30-year bond yield broke above 5% and is back to the peak yields we saw at the end of 2023. To put that in perspective, 30-year yields haven’t been this high since 2007 (see chart). Higher yields are good for savers; however, borrowers will pay the price.
The 30-year yield has been grabbing the headlines due to the levels we are now seeing but it is not the key rate that borrowers and savers measure against. The 10-year treasury is the most common, however, other debt and savings rates are based on other treasury maturities. But as the chart below shows, yields on most maturities are up meaningfully since the end of last quarter.
Big, Beautiful Borrower
The U.S. government is the largest issuer of debt in the world, and it looks like it isn’t going to change soon. Thus, with interest rates moving higher, the cost of debt for the U.S. treasury will continue to increase. The current average interest rate on U.S. government debt is ~3.3%. The average rate over the last 15 years was 2.5%; with all rates greater than 4%, this is only going higher. As seen in the table below, this results in interest expenses close to 20% of tax revenue (the chart below does not include the most recent bill passed by the house).
The data points below show what an average American family’s situation would be if they managed their household like the federal government:
Household annual income: $55,000
Household annual spending: $65,000
Credit card debt: $300,000
Annual credit card interest expense: $10,000
When we look at past data, the only conclusion is that taxes would have to increase and spending would have to decline, but apparently Washington D.C. doesn’t buy that.
Takeaways for the Week
After a strong rally of over 16% the last six weeks, stocks finished the week down roughly 2% as interest rates continued to trend higher.
Hard economic data continues to point to a healthy labor market, however, survey data is highlighting some caution with hiring.
In the last 27 years, NBA teams leading by 14 points with three minutes left in a playoff game have won all 970 instances…the Knicks broke that streak by losing to the Indiana Pacers Wednesday night.