Treasury yields have been climbing steadily, particularly on the long end of the curve, sparking renewed chatter from macro bears who see this as the harbinger of an impending crisis. If you’ve followed my content for a while, you won’t be surprised when I say: this isn’t the disaster they’re hoping for. Let’s break down why yields are rising, debunk some common macro bear arguments, and explore the dynamics behind this shift.
Why Are Yields Rising?
At its core, rising yields boil down to one thing: investor expectations. Specifically, expectations for future growth and inflation are now higher than they were just months ago. As markets anticipate stronger economic performance, this is being priced into the long end of the yield curve.
But there’s more to it than just investor sentiment. Understanding this phenomenon requires addressing two pervasive myths propagated by those forecasting doom: the “debt crisis” narrative and the “lack of demand for treasuries” argument.
Debunking the Debt Crisis Myth
One popular theory among macro bears is that the U.S. is on the brink of a debt crisis, fueled by the notion that our national debt is unsustainable. This view ignores some fundamental principles of monetary and fiscal policy in the United States.
The U.S. operates under a floating exchange rate regime and is the monopoly issuer of its own currency. Our debt is denominated in dollars, which we can create at will. This means the U.S. government can always meet its debt obligations, barring a political decision not to do so.
Additionally, government spending essentially pre-funds the issuance of debt. When the government spends, it injects reserves into the private sector, which then absorbs treasury issuance. This mechanism ensures there’s no “debt crisis” looming—a fear that has been debunked time and time again over the past several decades.
Addressing the “Lack of Demand” Argument
Another claim is that rising yields signal a collapse in demand for U.S. treasuries, exacerbated by reduced purchases from countries like China. Critics argue that China’s shift away from treasury purchases is causing yields to spike. However, this argument also falls short.
As long as China runs a trade surplus with the U.S., it will accumulate dollars. Whether those dollars are used to buy treasuries or allocated elsewhere, they eventually find their way into the financial system, where someone—be it a corporation, institution, or investor—purchases treasuries. The critical point is that the issuance of treasuries is always pre-funded through this cycle.
The Fed’s Role as Price Setter
A foundational concept in Modern Monetary Theory (MMT) is that the Federal Reserve acts as the monopoly price setter of interest rates. This power extends across the entire yield curve. If the Fed decided tomorrow to fix long-term rates at 3%, it could achieve that goal through its tools and mandate.
Currently, the Fed is managing rates in response to its dual mandate: maintaining stable prices (inflation control) and maximizing employment. When growth and inflation expectations rise, as they have recently, markets anticipate Fed action to counterbalance these trends, which drives yields higher as investors price in future rate hikes.
Higher Rates and Economic Growth: A Feedback Loop
Interestingly, we are witnessing a new paradigm where higher rates are themselves becoming stimulative. With a high public debt-to-GDP ratio, elevated interest rates generate significant interest income, which flows into the private sector and fuels growth. This has created a positive feedback loop:
- Higher rates increase interest income.
- Increased income supports consumption and investment.
- Rising economic activity reinforces growth expectations, pushing yields higher.
This dynamic has been a key driver of the economic resilience we’ve seen over the past two years, despite many forecasts to the contrary.
Looking Ahead
The rise in yields reflects an evolving growth cycle, not a crisis. The tightening labor market, robust consumer demand, and continued public sector spending are laying the groundwork for sustained economic expansion. While the Fed will likely continue to manage rates to balance inflation and growth, the underlying drivers of this trend suggest we are still in the early stages of this upward cycle.
For those concerned about rising yields signaling an imminent collapse, it’s essential to recognize the fundamental mechanisms at play. The macro bears have been wrong for decades, and current trends suggest they’ll remain wrong for some time yet.
Watch the Full Analysis
This article is a summary of the key points from my latest video, where I dive deeper into these concepts and share supporting data and charts. To watch the full discussion, click the link below: