The national debt exceeds $40 trillion, U.S. long-term Treasury yields are at 19-year highs, the U.S. Treasury Department is intervening in currency and bond markets. We unpack it all in this episode and show you how to position your investment portfolio to lock in higher yields and protect yourself from falling bond prices.
563 Audio
Show Notes
Debt to the Penny—Fiscal Data, U.S. Treasury
Historical Debt and Budget Tables—U.S. White House
Average U.S. National Debt Interest Rate—U.S. Treasury
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 563. It’s titled “How to Position Yourself for Rising Interest Rates.”
It’s been a remarkable period for the U.S. bond market over the past several weeks. We’ve had 30-year treasury bond yields, the interest rate hit its highest level since 2007. The U.S. national debt exceeded $40 trillion. The U.S. dollar has weakened, and there’s talk about the debasement trade is back. What is that? Well, that means the dollar weakens, down about 3% since late July, whereas other sort of monetary substitutes are doing very, very well.
Bitcoin’s up 26% since late July. Gold’s up 16% since late July. What in the world is going on with the bond market that’s putting upward pressure on interest rates? You’ve seen gold and Bitcoin do very, very well. Now, it hasn’t changed that much on a year-to-date basis. The dollar’s actually a little stronger, about a half percent stronger since the beginning of the year. Bitcoin’s still down 9% year-to-date, and gold’s up about 9% or so.
But the last six weeks there’s been a big change, and we’re going to take a look at what is driving higher interest rates, and more importantly, how can we position ourselves for this really new rate environment? And is there really a new debasement trade? It basically means the dollar is going to weaken, and weaken substantially because of a lack of credibility in the dollar. I don’t think we’re there yet. We’ll look at some charts, and we’ll discuss some data. We’re not there yet, but it’s a potential risk, which is why we want to position ourselves today for what might happen tomorrow.
What’s Driving Interest Rates Higher
First, let’s take a look at some of the underlying pressures that are driving interest rates. The first one we discussed a couple episodes ago, in episode 561, about the AI debt bubble, and the tremendous amount of borrowing that is occurring in the financial markets, the bond market, to fund AI infrastructure build-out. McKinsey, Goldman Sachs, J.P. Morgan estimate kind of around $6 to $7 trillion will be invested in AI data centers and infrastructure, that includes power infrastructure. 75%, according to J.P. Morgan, funded through debt. That’s about $4 trillion in new debt borrowings that competes with U.S. Treasury bonds.
The recent minutes for the Federal Reserve Open Market Committee, the staff pointed out that the makeup of the government debt market, who’s buying it—it’s less official public sector and more private sector. Which means if AI companies, the hyperscalers, are issuing hundreds of billions of dollars of debt per year, that is competing with U.S. government, which is also issuing hundreds of billions of dollars of debt each year.
And if you have that level of supply coming on, and the demand’s there, but the clearing rate is going to be higher. And that’s what we’re seeing with very much long-term treasuries. Let’s take a look to see where yields are now. 30-year treasury bond yields have hit 5.27%, just a couple days ago. Now, the long-term average is 6.2%. And so these—you go back, you look at the yields back in the ’80s and ’90s. Yeah, interest rates are up dramatically from under 2% back in 2020.
Now, 30-year treasury bond yields are over 5%, the highest level since 2007, but they could definitely go higher, and that’s why we’re going to look at the forces that are driving those interest rates.
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