Analysts at NewEdge Wealth contend that the recent surge in bond yields signifies a departure from a long-standing trend rather than a return to "normal" levels seen in the 2000s. They highlight that bond yields experienced a 40-year downtrend, with the 10-year Treasury yield falling from an apex of 15% in 1981 to a nadir of 0.5% in 2020. This prolonged period allowed borrowers to largely enjoy a falling cost of capital, where refinancing often came with a lower cost. However, this 40-year bull market in bonds ended in 2022, and yields have been on the rise since.
NewEdge Wealth emphasizes that while current yields are higher than the abnormally low range of the 2010s, the critical comparison is the shift from a 40-year downtrend to a recent uptrend. This change has begun to disrupt certain market and economic sectors, with one notable impact being the skyrocketing cost of servicing U.S. public debt, now at an annualized $1.2 trillion. Interest expense as a percentage of GDP has reached levels not seen since the 1990s.
The analysts suggest that debt and deficit decisions carry far greater consequences in this rising rate environment compared to the falling rate environment of the bond bull market. They plan to further explore whether this uptrend in yields will continue, potentially leading to new cycle highs for 10-year and 30-year bond yields, which would have significant implications for bond investors, broader markets, and the overall economy.
