Making Sense of Higher Long-Term Rates

The 30-year Treasury is paying more than 5% — a twenty-year high. Should I be worried?"

‍‍We have been asked a version of this question several times in recent weeks, along with its cousins: peak fear? Peak yields? Peak earnings? Peak AI?

Our short answer: a 5% long bond is not, by itself, a warning. It is a repricing. It changes what you earn on new money, what you pay to borrow, and what you should be willing to pay for a dollar of future earnings. Those are consequential things. But the yield level alone is not a risk signal, and we are not treating it as one.

The 10-year Treasury yield sits near 4.6%. The 30-year is above 5.0% and touched its highest level in roughly 19 years earlier this month. Mortgage rates are near 6.7%. The national debt just crossed $40 trillion. If you are reading headlines and feeling uneasy, that is a reasonable response. If you started investing after 2008, you have never seen this. If you started in the 1980s, it looks ordinary. That gap in experience explains most of the worry.

Here is the context those headlines usually leave out.

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We have been here before.

Three times in fifteen years, a rating agency downgraded U.S. debt: S&P in 2011, Fitch in 2023, and Moody’s in 2025. Each one was treated as a milestone on the road to crisis.

What is easy to forget is what happened next. After the 2011 downgrade, Treasury yields fell - meaning the U.S. government could borrow more cheaply than before, not less. Investors worried about the U.S debt load and political instability bought the very bonds the agency had just criticized. S&P's verdict was that America had become a riskier borrower; investors lent to it at a lower rate anyway. Though counterintuitive, that reaction is the clearest evidence that a Treasury yield reflects far more than how much the government owes or what an agency says about its credit.

That is not an argument that debt does not matter. It is a reminder that deficit worry is one of the most reliable political tools in Washington - raised loudly by whichever party is out of power and quietly shelved by whichever party is in it. The pattern is consistent enough that the alarm itself tells you very little about what the economy and capital markets will actually do.

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Four facts that do not fit the panic story.

• ‍Debt levels alone do not set interest rates. Over the past forty years, U.S. debt as a share of the economy climbed steadily while long-term rates fell. That seems backwards until you consider what investors are actually paying for: the depth of our markets, the role of the dollar, and the growth of our companies. Those matter more to a lender than any single ratio.‍
• Japan is the extreme case. It carried government debt above 200% of its economy for three decades and borrowed at nearly zero. Japanese yields are rising now — the 10-year is near 2.9%, a 30-year high — but notice what changed. Not the debt. Inflation and central bank policy changed.‍
• The math inside today’s yield is calm. A 4.6% ten-year yield is roughly 2.3% of expected inflation plus about 2.3% of real return. The expected-inflation piece has actually drifted lower this year, through war and an oil shock. Bond investors are not pricing a spiral. A real yield near 2% is simply normal by historical standards.‍
• There is a record $7.9 trillion sitting in money market funds. That is not a market that has run out of buyers for safe assets. It is a market that wants to be paid.

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So what is actually pushing rates up?

Two things: inflation worries and plain supply and demand.

On inflation, energy has been the swing factor. Oil traded above $114 in March, when the Strait of Hormuz — the channel that carried a fifth of the world’s oil — effectively closed. This week, reports of a temporary shipping corridor pulled crude back to roughly $81.

Follow the chain: ships move, energy gets cheaper, that flows through everything from freight to groceries, inflation pressure eases, the Fed feels less need to stay tight, and long-term yields can settle. The chain runs backward just as easily. This is exactly why we watch for confirmation instead of predicting the next link.

On supply and demand, the government is issuing a great deal of debt and companies are issuing at a record pace to build AI Infrastructure. Meanwhile, some long-standing buyers have stepped back - Japanese investors sold roughly $30 billion of U.S. debt in the first quarter alone. More paper, fewer eager hands. Treasury tried to help this month by doubling its bond buybacks. Yields fell for a day and then climbed right back. That tells you how large the underlying force is.

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High rates and a growing economy can coexist.

In the late 1990s, the 10-year Treasury yielded around 6%. Unemployment fell to a thirty-year low, productivity boomed, and the S&P 500 more than doubled between 1995 and 1999. High rates were simply the price of money, not a verdict on the future.

Something similar has been true since 2022. Rates rose sharply,  and the bull market did not end. Companies grew both sales and profits. Lenders kept lending. A capital spending boom is funding future growth, and employment has held up well enough for people to keep spending.

The real risk is narrower. Many companies borrowed very cheaply before the pandemic, and that debt is now coming due. About half of publicly held government debt also matures within three years at an average coupon near 3.3%. Refinancing at today’s rates costs real money, and some weaker borrowers will not make it. That is a story about individual companies rather than the whole market.

Yields alone cannot break a trend. They can make the climb harder — a rally without the wind at its back.

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What does this mean for you?

• ‍The good news is real. High-quality bonds pay more than they have in nearly two decades, which means they can finally do their job again: generate income and cushion a portfolio.‍
• Cash is not free. Money market funds pay about 3.5%. Inflation is running about 3.5%. Your purchasing power is standing still, and cash always requires a second decision — when to get back in — that very few people make well.‍
• Higher rates are a discount rate. When safe bonds pay more, investors pay less for a dollar of future profit. Expensive assets feel that most. It argues for owning things at sensible prices, not for leaving the market.

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How we approach it.

We do not know whether long-term rates head to 6% or back to 4%, and neither does anyone else - though many will tell you otherwise with great confidence.

What we do know is that the near-zero rates of the 2010s were never realistic. Returning to an older, more honest price for money will cause dislocations along the way, and it may eventually force a fiscal reckoning. That is uncomfortable. It is also survivable, and probably healthier.

Our process does not require a forecast. It requires us to decide in advance what would change our mind, and then watch for it. In a market this foggy, that discipline is not a limitation. It is the entire point.

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Balentine LLC (“Balentine”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Balentine’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The opinions expressed are those of the Balentine Investment Team. The opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational use only and should not be considered investment advice specific to your financial situation.