Warning To Investors: Alarming Rise In Yields Could Spell Trouble Ahead

Summary of YouTube Video: "The Alarming Rise in Yields & Why Fed Rate Cuts Might Not Help"

Key Concepts:

• Yields: The return an investor receives on a bond, inversely related to the bond's price.
• Deficit: The amount by which a government's spending exceeds its revenue in a given period.
• Fiscal Dominance: A situation where government fiscal policy (spending and taxation) heavily influences monetary policy (interest rates and money supply).
• Fed Funds Rate: The target interest rate that the Federal Reserve wants banks to charge one another for the overnight lending of reserves.
• Inflation Premium: The portion of a nominal interest rate that represents compensation for expected future inflation.
• Yield Curve: A line that plots the yields (interest rates) of bonds having equal credit quality but differing maturity dates.
• Front Running: The practice of entering into a trade knowing it will influence the market in a way that will benefit the trader.

1. The Problem: Rising Long-Term Yields

• Globally, particularly in the US, Japan, and France, long-term bond yields (10-30 year) are increasing, meaning bond prices are falling.
• In the US, the primary driver is an excessive supply of debt due to a persistently large and growing deficit.
• The US deficit in 2025 is projected to be the largest in peacetime since World War II.
• Government spending is at crisis levels relative to GDP, comparable to levels seen during the 2008 financial crisis, 2020 pandemic, and the Cold War.
• The supply of bonds is outpacing demand, causing prices to fall and yields to rise.
• Analogy: Like a stock with a dividend yield, if the price of a bond falls while its coupon (interest payment) remains the same, the yield increases.

2. Impact on Consumers and Businesses

• Most consumer and business loans (mortgages, car loans, credit cards, business lines of credit, real estate investment loans) are based on 10-30 year bond yields, not the Fed Funds Rate.
• The Fed Funds Rate is an overnight rate for interbank lending and has limited direct impact on long-term borrowing costs.
• In a situation of fiscal dominance, the front end of the yield curve (short-term rates) is artificially suppressed by political forces, further decoupling it from long-term rates.
• Upcoming loan extensions, especially those with 10-year terms, will not significantly benefit from anticipated Fed rate cuts.

3. Market Anticipation and "Sell the News"

• Markets are forward-looking and price in expected events (like Fed rate cuts) well in advance.
• Yields on 2-year bonds have already fallen in anticipation of future Fed rate cuts.
• The actual implementation of rate cuts may become a "sell the news" event, potentially causing yields to rise after the cuts occur because the market has already priced them in.

4. The 2024 Precedent: Fed Cuts and Rising Yields

• In the fall of 2024, the Federal Reserve aggressively cut the Fed Funds Rate by 100 basis points (from 5.33% to 4.33%).
• During the same period, the 10-year Treasury yield increased by 100 basis points.
• This demonstrates that Fed rate cuts do not automatically translate to lower borrowing costs for the real economy.
• The speaker has a video on TikTok and Instagram (@SpencerAkimian) detailing this phenomenon and its negative economic effects.

5. The Risk of Repeating Past Mistakes

• The speaker argues that the Federal Reserve may be repeating the mistake of cutting rates prematurely, as it did in the fall of 2024.
• Cutting rates in the face of persistent inflation can add an inflation premium to long-term yields, ultimately increasing real borrowing costs.
• In the fall of 2024, real GDP growth was strong (3%), suggesting that aggressive rate cuts were unnecessary.
• Currently, the US faces a weakening job market but also an inflation problem, exacerbated by tariffs.
• The speaker fears that cutting rates now will have adverse effects, mirroring the events of September 2024.

6. Key Arguments and Perspectives

• Argument: Excessive government debt is the primary driver of rising long-term yields.
  • Evidence: The US has a historically large deficit and is spending at crisis levels.
• Argument: Fed rate cuts may not lower borrowing costs for consumers and businesses and could even be counterproductive.
  • Evidence: The 2024 experience showed that Fed cuts can coincide with rising long-term yields.
• Argument: The Federal Reserve is potentially making a policy error by cutting rates in the face of inflation.
  • Evidence: Inflation remains a concern, and cutting rates could exacerbate it.

7. Conclusion

The video highlights the concerning trend of rising long-term bond yields driven by excessive government debt. It challenges the conventional wisdom that Fed rate cuts will automatically lower borrowing costs, pointing to the 2024 experience as a cautionary tale. The speaker argues that the Federal Reserve may be repeating past mistakes by cutting rates prematurely in the face of persistent inflation, potentially leading to higher real borrowing costs and adverse economic consequences. The key takeaway is that long-term yields, not the Fed Funds Rate, are the primary determinant of borrowing costs for consumers and businesses, and these yields are increasingly influenced by fiscal policy and market expectations of future inflation.