September 24, 2026
A few months ago, my youngest received her driver’s license. It was another celebratory milestone in parenting, and it only required a few hours of co-piloting with a handful of terror-filled moments sprinkled in. When I was her age, my high school driving instructor taught us the standard mirror checks, but had one rule he repeated until it stuck: never take your eyes off what’s in front of you. Investors have a hard time remembering that rule. Human nature directs your attention to what has, and hasn’t, worked for you in the recent past. That’s a lot like focusing on the rearview mirror while you’re driving down the road.
Looking in the rearview mirror, the 30-year U.S. Treasury yield peaked at 15.2% in 1981. Aside from a few short-lived episodes, the yield on our 30-year debt steadily drifted lower over the following forty years, eventually trading below 1% for a few moments during the pandemic in 2020. Then things began to change, albeit slowly. There was historic stimulus, both monetary and fiscal, injected into the economy during the pandemic. That helped the U.S. skirt an economic crisis while spurring inflation and equity prices much higher. In response, bond yields began to rise with the 30-year Treasury trading at 2% in 2021, 3% in 2022, and 4% in 2023. A couple of years of yield equilibrium followed. But rising tariffs, re accelerating inflation, and a soaring deficit have sent yields climbing again.
Peering out the windshield now, investors see a 30-year Treasury yield at 5.3%, its highest level since 2006.
Think of this as a flexible orange traffic cone. We’d prefer not to hit it, but it’s at the front bumper now, so c’est la vie, we’re running over it, hopefully with little to no damage. Looking farther down the road, there are more significant obstacles, and these can damage the car. For instance, investments in everything from housing to factories can fall, or even grind to a halt. Additionally, money can be sucked out of the equity market and into bonds. Though I haven’t witnessed much of that at current levels, I am reasonably certain a guaranteed Treasury return of 6–7% would change that dynamic.
Making Potholes, Not Repairing Them
Many of these potholes on the horizon are difficult to patch. Twenty years ago, federal debt held by the public sat at roughly a third of GDP. Today it’s just past 100%, a level that’s posed problems for many international economies. Foreign investors have held the U.S. in the highest regard for decades, but there are signs that status may be deteriorating. There are ways to fix this problem, of course, but I’m not familiar with any politicians campaigning under the banner of “Higher Taxes and Lower Entitlement Spending!” At this point, simply maintaining the current levels of indebtedness would be a victory, albeit highly unlikely. The U.S. is currently running an annual deficit to GDP of ~6%, a level historically associated with wars and recessions…far different than today’s growing, full employment U.S. economy.
Unfortunately, the public’s confidence in our traffic cops is declining. Fed Chairman Kevin Warsh’s first press conference reminded me a lot of a 6th grade book report I once delivered (I hadn’t read the book). We both lacked meaning and direction, while possessing a strong desire for the performance to end. Not surprisingly, the bond market questioned his messaging and yields rose in the following weeks. His subsequent speeches at Jackson Hole and last week’s Fed meeting, fortunately, went much better, so there may be hope yet.
Sadly, I don’t share the same optimism for Treasury Secretary Scott Bessent. He has taken the extraordinary step of directing the Treasury to buy back long-term government bonds and issue more short-term debt in an effort to cap long-end yields. He’s also repeatedly said publicly that current yield levels don’t reflect the market’s true fundamentals. There’s nothing quite like a ref arguing with the scoreboard to shake market confidence. His panicked attempts to bring down Treasury yields remind me of the Muppets’ Swedish Chef flailing around while desperately tossing a new ingredient into the bowl in an effort to make a tastier product. Unfortunately, the chef’s ingredients aren’t helping. If anything, they are pushing Treasury yields higher by damaging U.S. monetary credibility.
The Bond Market & Your Shock Absorbers
Alas, all is not dark on the road ahead. Thankfully, we drive a sturdy vehicle, and we have functional headlights. The good news, countering all of the aforementioned bad, is that the bond market is beginning to pay investors a decent rate of return. That’s a much-needed silver lining, as “why bother?” is one of the most frequently asked questions regarding clients’ bond exposure. Fatigued by years of zero or negative returns, many investors don’t see the value in bonds. But that is the rearview mirror; we’re trying to keep eyes forward.
Though intimidating to many investors, bonds are surprisingly simple, if you aren’t scared off by a little math. That said, I’ll spare you the calculations and give you the executive summary. First, you should know that 80-90% of a bond’s total return is predicted by the yield to maturity (YTM) at the time of purchase. For example, a high-quality corporate bond in 2021 yielded 2% and today it yields 6%, so that’s a 4% annual yield advantage. Further, a bond yielding 6% is less sensitive to changes in interest rates than one yielding 2%.
As a visual example, imagine driving the same stretch of potholes in two different cars. A 2%-yielding bond is like riding on bald tires and worn-out shocks. Every bump in interest rates jolts straight through the cabin. A 6%-yielding bond is like riding on a fresh set of shocks with new tires. The potholes are the same, but the car absorbs them, and you arrive with a lot less rattling around.
I confess, “why bother” is a fair retort if one believes stock markets continue their upward ascent. To that end, why bother owning anything but U.S. large tech stocks? Bothering is our job though, and for good reason, as we have been around to witness cycles come and go. This boom in all things AI has been impressive in its magnitude and longevity, but pay attention to what’s on the road ahead. Parts of the Treasury yield curve making 20-year highs are a game-changer. There are plenty of risks: for the U.S. stock market, the economy, and the size of our national debt. But one positive of this new environment is that today’s yields (earned on high-quality, appropriately positioned bonds) represent an attractive investment for balanced investors, something we haven’t been able to say with high conviction in over a decade. There’s no need to make a directional bet on where interest rates go next; instead, we favor building bond portfolios across maturities. That’s what’s in front of us: keep your eyes forward. It’s a different road than we’ve traveled in the past, but I’d encourage you not to overlook bonds because they didn’t help you on the most recent stretch of road.
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