Welcome! In the realm of financial commentary, there has been a surge of alarmism surrounding the state of the US Treasury bond market and the dollar. Many voices, especially from YouTube and Twitter, have been predicting impending doom. In our previous discussions regarding the Iran conflict, we have countered these claims, and I appreciate Rob Urie’s detailed examination of one of these misleading narratives.
The Dollar and Treasury Bonds: No Cause for Alarm
As we discussed earlier, the dollar was significantly weaker during the post-financial crisis years and remained low for a considerable time. A 5% interest rate is not exceptionally high by historical standards, especially when compared to current inflation rates. The US government is fully capable of meeting its dollar-denominated obligations, eliminating the risk of an involuntary default.1
Moreover, the brief period of interest rate suppression by Bessent coincided with a Treasury auction. A lack of competitive bidding, which would typically indicate lower demand, did not occur; instead, the bids remained within normal parameters. If there was indeed a crisis in the Treasury market, we would have observed significant upheaval and a dramatic lack of interest in these auctions.
Rising Treasury Rates: Symptom, Not Cause
It’s important to note that while the possibility of a severe financial crisis looms larger, rising interest rates on longer-dated Treasuries are not the cause but rather a symptom of inflation. This trend is evident as rising yields affect government bonds across major and even smaller economies, leading to a decline in financial asset prices.
Typically, riskier bonds are the first to suffer in such conditions, which in turn affects the financing capabilities of higher-risk companies. Liquidity tends to be constrained in this segment of the market initially.
Historically, a lag of four to five months would occur before stock prices reflected the growing investor risk aversion seen in weaker credit markets. However, the intertwined nature of AI funding and stock price potential could lead to a sweeping sell-off in AI, cascading into broader financial asset markets.
The Real Economy Under Threat
Additionally, we must consider the ramifications on the real economy, exacerbated by rising energy and food prices, along with shortages of crucial commodities like sulfur. The true risk resides not simply in a potential global depression, but in the fundamental challenges posed to the financial markets and credit systems that have facilitated growth. Our economic structure may need a complete overhaul, and it is concerning that our current leadership lacks the ability to handle such a monumental task.
A brief clarification: Rob mentions Bessent’s attempts at implementing Quantitative Easing (QE). It is crucial to note that only the Federal Reserve has the authority to execute QE, as it lacks the necessary tools; moreover, there’s little evidence that the Fed supports such moves at this time. Current statements reveal a somewhat hawkish stance from the Fed, distinctly different from the coordinated communication seen leading up to the 2008 crisis.
A Cycle of Financial Alarmism
Time and again, the US has fallen into cycles of fiscal panic. Each episode seems to come with its own elaborate, yet unfounded, explanations. For instance, who remembers the fervor over the supposed prevalence of devil-worshipping pedophiles in schools or claims regarding Iraqi WMDs? In the same vein, the recent discourse suggests that the US is facing a significant bond market crisis. Reports of skyrocketing yields seem alarming at first glance, yet a closer look reveals they are either stable or at expected historical levels, not indicative of a true crisis.
Graph: 2009 – today the Federal Reserve has used QE to raise financial asset prices. The economic insight is that buying intermediate and long-term treasury notes and bonds lowers interest rates, making financial leverage cheaper. In other words, it is a way of rigging financial markets to always go up. The danger is that the farther prices deviate from fundamental indicators such as corporate profits, the greater the potential decline when market corrections eventually occur. Sources:
St. Louis Federal Reserve.
Having warned about overstated financial asset values for some time, it’s essential to clarify that I do not imply that unmonitored (by the Federal Reserve) markets represent good opportunities for investment. It’s likely that asset prices will be halved or more in the coming years. However, this is distinct from claiming we are currently facing a ‘bond market crisis.’ Evidence from recent graphs does not substantiate any such crisis; rather, Treasury bond prices appear stable despite geopolitical tensions and inflation concerns.
Current Yield Trends
As of late August 2026, both nominal and real bond yields sit below their historical averages. This suggests them to be relatively valuable compared to past economic circumstances. Interpreting nominal bond yield averages requires caution due to non-stationary means; this is why adjusting for inflation provides more context to bond yields. The Taylor Rule, which estimates fair values for the Fed Funds rate, explicitly accounts for interest rates in assessing bond yields.
Graph: anxiety over rising bond yields should correlate with actual rises in yields. In fact, the yield on the benchmark US 10-Year Treasury remains below its average from the last forty years in both nominal and real terms. The graph above illustrates the monthly variations in nominal bond yields, reinforcing that there isn’t currently any widespread panic reflected in them. Source:
St. Louis Federal Reserve.
Graph: Despite media dramatizations, the Real Yield on the US 10-Year Treasury remains below its historical average. Although Real Yields have experienced a recent uptick, this aligns with a rapid increase in CPI inflation. Until the media frenzy escalated, it was widely recognized that inflation drives bond yields by affecting bond prices.
St. Louis Federal Reserve.
Political Implications of QE
With US Treasury Secretary Scott Bessent re-engaging QE to manage yield levels, the sensationalism surrounding the bond market seems politically motivated. QE is understood to have elevated financial asset valuations from 2009 to the present. Donald Trump’s core followers include wealthy individuals whose fortunes hinge on inflated asset values driven by QE. For Trump, the stock market serves as a barometer of economic health, though it primarily reflects financial conditions rather than economic realities.
QE serves as a tool of the Federal Reserve’s open market operations, traditionally aimed at interest rate management to benefit banks. By borrowing reserves at the rate set by the Fed, banks are encouraged to lend. QE specifically affects long-term Treasury yields. The Fed strives to lower borrowing rates for auto loans, student loans, and mortgages to enhance affordability, albeit at the risk of adjusting prices upward in response.
Historical Context of Valuation Levels
Why is this approach potentially detrimental? Currently, US stock markets are situated almost precisely where they stood in 2000 during the Dotcom bubble collapse. At that time, it was clear that stock prices were grossly overpriced, with the Shiller CAPE (Cyclically Adjusted Price-Earnings ratio) at 44—the highest recorded that time. Today, the CAPE rests at 42.5, compared to an average of about 12 in pre-bubble periods. Additionally, current house prices are 10% higher than they were at the zenith of the recent housing bubble, marking it as the most significant housing bubble in US history.
Graph: For readers who prefer nominal 10-Year Treasury Bond Yields, the current yield also remains beneath the long-term average for this metric. Given its apparent non-stationary average, adjusting it for CPI inflation offers it greater economic context. Bond investors are focused on real yields, considering inflation levels when investing. The current inflation rate necessitates that bond yields rise to yield positive real returns. Source: St. Louis Federal Reserve.
Graph: The graph displays the rapid rise and subsequent moderation of CPI inflation. The current level remains above recent figures. Logically, Treasury bond yields must increase to sustain a positive real rate. It’s curious that critics of rising bond yields overlook inflation, suggesting a potential political agenda. Source: St. Louis Federal Reserve.
No Signs of Panic
The challenge is recognizing that current bond yields seem relatively stable amidst inflation’s influence. Given the manipulated nature of financial returns since the stock market crash in 1987, defining “normal” is complex. Presently, however, no signs of panic are apparent in the US bond market. While financial panic might seem warranted, the Fed’s use of QE to ease market conditions puts a stabilizing floor under prices until QE concludes.
In conclusion, while various factors may appear to cultivate financial panic, there is no indication that interest rates will rise imminently. Historical data suggests that serious stock market declines have rarely begun during periods of declining Fed rates. This doesn’t preclude the possibility of a downturn; however, the prevailing dynamics of financial asset pricing are currently aligned with rising stock prices and falling bond yields.
Finally, the alarming narratives surrounding the bond market do not hold up under scrutiny against the available evidence. A thorough, swift examination reveals a different reality than is being communicated in the media.
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1 Yet, as Keynes wisely noted:
“Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
This observation suggests that Team Trump, influenced by mainstream narratives on fiscal discipline, might inadvertently exacerbate the situation by relying on misguided policies.
