Two days ago,  the US Treasury Ten-Year Yield (US10Y) blew past 5% to reach a high of 5.04%, reaching its highest level since July 2007. This is bad news for the government and consumers, but could be good news for investors. 

1. Federal Budget and Debt Servicing

When yields stay above 5%, the government’s borrowing costs go through the roof. As existing debt matures – with $11T coming due in 2026  – the Treasury has to replace it with new debt issued at much higher interest rates. This could easily add $250B to $350B to the already high $1.2T interest payment. To cover this, the federal government will need to borrow even more money, which will drive borrowing costs even higher. This scenario is called a debt spiral – where rising debt and interest rates reinforce each other until the shit hits the fan. 

2. Threat of Inflation

To arrest the debt spiral, politicians will let inflation to go higher, maybe even significantly higher, while continuing to pay lip service to price stability. For consumers and ordinary wage earners, inflation eats away at their earning and buying power. Compounding the issue,  a 5% Treasury yield means higher interest rates on mortgages, car loans, and credit cards. Overall, it’s not a pretty picture for them.

3. Good for Investors?

On the other hand, if you have money put aside for investment, this could be good news. Yields on taxable corporate bonds are approaching 7% while yields on tax-exempt municipal bonds are reaching 4.5%. These levels of yields were unimaginable just a few years ago when rates were hovering near zero. How the times have changed – I could write a whole article explaining why it has changed so much.

For stock investors, however, it’s a mixed bag. On one hand, the 5% risk-free yield pulls money out of stocks and into safe bonds. On the other hand, the only way to keep the borrowing cost somewhat manageable is for the Fed to print more money. That extra money will make prices of all things go up, but might make asset prices go up even faster.

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