Rising Interest Rates

The 30-year Treasury yield climbed to 5.31% on August 17th, which marked its highest level since June of 2007. Long-term interest rates have risen fairly steadily since the end of the Covid-induced recession:

There are multiple hypothesis as to why long-term rates have risen, and it’s plausible that a combination of factors are in play. David Lynch suggests the AI boom has soaked up so much capital that govenments have to pay higher rates in order to induce investors to lend them money.

John Cochrane lists several possible explanations. Inflation and the Fed could be pieces of the puzzle. If bond buyers expect higher future inflation they will require higher interest rates as compensation. If they believe the Fed is likely to raise rates in the future, then Treasury yields will rise as well.

Cochrane also speculates that interest rates may simply be returning to historical norms. Indeed, if we take a longer-dated chart, the strange era isn’t now—it’s the 2010s, with ultra-low interest rates:

Cochrane suggests that the 2010s were a low-growth era with weak investment opportunities that have only been recently revived by the AI boom, and notes that low growth is typically associated with low interest rates.

Cochrane also points to sovereign debt as a possible factor. The U.S. national debt recently crossed the $40 trillion mark, and numerous developed countries have high debt-to-gdp ratios as well. Investors may be concerned that the U.S. is too dysfunctional to get its fiscal house in order, and are therefore shying away from long-term bonds. Lee Ying Shan also observes that if yields rise in other developed countries, such as Japan, there may be a ripple effect, as investors demand higher yields to invest in the U.S. For now, Cochrane is reluctant to draw any kind of strong conclusions, as there are more questions than answers with respect to macroeconomies and long-term interest rates.

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