Video Summary
30-yr and 10-yr Treasury yields have recently broken higher, threatening broader borrowing costs.
Rising inflation expectations are forcing lenders to demand higher long-term rates.
An expanding money supply is a core driver of renewed inflation pressure.
Major buyers (Fed, foreign central banks) have retreated, reducing demand for long-term Treasuries.
Post‑crisis bank regulations and the SLR dynamics discourage banks from holding long-term Treasuries, trapping unrealized losses from rate moves. Â
Because inflation expectations have risen, the money supply has expanded since 2023, and traditional large buyers (the Fed and many foreign central banks) have pulled back—reducing demand and pushing yields higher.
Post‑crisis rules created conflicting incentives: Treasuries are required as safe assets but also count toward leverage limits. A temporary SLR suspension in 2020 encouraged large Treasury purchases; when rates rose those positions produced unrealized losses, and reinstated limits now discourage banks from buying more.
Buybacks are the Treasury buying existing debt to support liquidity, but they’re funded by issuing new debt. This can create borrowing cycles, fail to reduce net debt costs, and introduce new market distortions and risks.
Possible fixes include eliminating the supplementary leverage ratio (most likely), another round of QE, or yield curve control—though QE/yield-curve control would be politically unpopular.
Higher yields raise borrowing costs across mortgages, corporate loans, and credit, increase government interest expenses (straining the budget), and can slow growth—potentially causing higher rates until a market or policy-driven break occurs.
"The US bond market is breaking and it's putting everything else at risk."
The US government’s 30-year Treasury yield has reached 5.26%, surpassing a range it held since 2023 and exceeding levels from 2002 to 2007.
The 10-year yield is approaching 5% rapidly, indicating a concerning trend despite a more leveraged global economy and a worse financial position for the US government concerning debt, deficits, and obligations.
An increase in the cost of US government debt signals a broader increase in all types of debt, which threatens to slow or even decline the entire economy.
"Yields were actually falling for about 40 years from 1980 through 2020."
From 1980 to 2020, interest rates were on a downward trend, leading to a range-bound behavior for yields.
The question arises: Why have yields broken out of this trend, and what factors are contributing to their rapid increase now?
"The more people expect inflation to continue to rise, the more long-term interest rates are going to rise."
Inflation expectations have shifted significantly; after volatility and a downward trend in the Consumer Price Index (CPI) from 2023 to 2025, inflation has re-accelerated.
A notable peak of 4.2% was recorded in May, leading lenders to adjust their expectations for long-term loans, demanding higher rates to offset potential losses due to inflation.
This includes rising costs for mortgages, corporate bonds, auto loans, and credit card loans, as lenders adjust to anticipated inflation.
"The most important one that always gets overlooked is the money supply."
Several factors have contributed to rising inflation: tariffs, war, and ineffective responses from the new Federal Reserve Chairman to combat inflation are notable.
A critical overlooked factor is the expansion of the money supply, which has surged since 2023, contributing to inflationary pressures regardless of interest rate changes.
"More money chasing the same amount of goods or services leads to inflation."
The relationship between money supply and prices is fundamental; as the money supply grows, inflation is likely to rise, creating upward pressure on prices despite counteractive measures such as interest rate adjustments.
Even with rising interest rates and tightening measures, an increasing money supply fuels demand, resulting in persistent inflationary pressures.
"The main buyers of treasuries were basically foreign central banks and the Federal Reserve."
Historically, large institutional players like central banks have supported US treasuries, indifferent to price fluctuations, as they print money to facilitate purchases.
Since 2022, the Federal Reserve has retreated from purchasing long-term treasuries, diminishing demand at longer maturities, resulting in higher yields in that segment of the market.
Concurrently, foreign central banks, particularly Japan and China, have also diminished their holdings in US treasuries, further exacerbating the supply-demand imbalance and increasing yields.
"Most major central banks around the world have been drastically slowing down or even reversing their purchases of US treasuries."
Central banks worldwide are facing severe economic challenges, which has led to a significant reduction in their buying of US treasuries.
Although these banks would prefer to invest in treasuries due to their safety, the current global economic climate limits their ability to do so.
In the aftermath of the financial crisis in 2008, US banks, which previously served as major buyers of treasuries, have significantly withdrawn from this market.
"Regulators came in and said, 'We don't want you to be able to take the risk that you just took on, which led to the crisis.'"
Following the global financial crisis, new regulations were established to limit the risks that banks could take, impacting their investment strategies significantly.
Banks are now subject to conflicting regulations regarding the purchase of US treasuries, which affects their ability to lend and invest productively.
There are specific requirements for banks to hold treasuries, yet these holdings can count against their risk limits, creating a conflicting situation.
"In 2020, treasury yields plummeted... banks could gorge themselves on as many US treasuries as they wanted."
In 2020, a temporary lift on restrictions allowed banks to invest heavily in treasuries without penalties related to risk limits, leading to a significant drop in yields.
This decision was taken to prevent a potential lending crisis and support the economy during the pandemic, encouraging banks to buy treasuries aggressively.
However, as inflation surged unexpectedly, the need for the Federal Reserve to increase interest rates left banks with significant unrealized losses on their treasuries.
"The Federal Reserve stepped in and said, 'If you're sitting on any treasuries that currently show an unrealized loss, you can sell them back to us for full price.'"
To prevent widespread bank runs following the struggles of Silicon Valley Bank, the Federal Reserve offered banks a benefit where they could sell treasuries back at face value.
This intervention quelled immediate panic but introduced apprehension among banks about future yield fluctuations.
Now, banks are held back by stricter regulations, facing penalties when required to purchase treasuries, as the temporary suspension on limits has ended.
"The US government is doing a ton of Treasury buybacks... the only way they can buy back existing debt is by issuing new debt."
The US government is engaging in substantial treasury buybacks to manage bond market volatility and support liquidity while contending with high-interest rates.
Notably, buybacks typically occur at the longer end of the curve since the government struggles to attract buyers for long-term bonds.
To fund these buybacks, the government must issue new debt, leading to a cycle where it borrows more to pay off its obligations.
"Interest on the national debt is already the largest line item on the budget."
The US government's budget is increasingly strained by growing interest payments, which are a substantial cost and have the potential to exacerbate the fiscal crisis.
A rising debt burden leads to further borrowing, creating a cycle of increasing obligations that places immense pressure on the national budget.
Cutting interest payments presents a politically feasible solution as there are fewer interest groups adversely affected compared to funding cuts in social security or defense.
"I think the number one way they're going to try and deal with this is with a supplementary leverage ratio elimination."
Alternatives such as another round of quantitative easing (QE) or yield curve control could be considered to counteract the issues in the bond market.
The elimination of the supplementary leverage ratio may be a critical step to relieve pressure on banks by allowing them more freedom in their treasury purchases.
Discussions around these potential changes have already surfaced, with proposals submitted earlier this year.
"The higher yields go, the more pain the economy starts to see everywhere."
Rising yields indicate increasing borrowing costs, which can lead to more economic distress for consumers and businesses alike. This can impact spending and investment across various sectors, slowing down economic growth.
As yields rise, the US government also faces increased financial strain due to higher interest payments on its debt obligations. This creates a challenging environment for policymakers, who must consider the implications of these changes.
"I think something like another round of QE to try and solve this problem would be extremely politically unpopular."
The mention of another round of quantitative easing highlights a reluctance to resort to controversial monetary policies that could be perceived negatively by the public and lawmakers.
The article suggests that policymakers may explore alternative measures that address the economic challenges without provoking political fallout, indicating a careful balancing act.
"Without any other big buyers stepping into the scene that used to be big buyers, we're not going to see any meaningful change."
The bond market relies on substantial institutional investors to create stability and liquidity. When these buyers are absent, it can lead to sustained high rates, as there is less demand to absorb the supply of bonds.
The current environment suggests that bond yields will continue to rise until there is a significant disruption or "something breaks" in the market, potentially triggering a shift in policy or investor behavior.
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