When my wife and I were first married, I worried about storms. Of course, our incomes were low, and any damage from wind or a leak would have certainly shocked our budget. Most nights I would lie awake nervous about what I’d find the next morning. I think a lot of young investors feel that way right now as they live with higher interest rates than they ever have, and it is impacting their investing worldview.
I’m reading several analysts who are worried about the 30-year Treasury yield, using words like “rout” or “new normal.” I also wonder if they are just trying to get attention online, or maybe they haven’t been doing investments long enough to see the cycle come back around. Either way, I’m not surprised by the bond yields, and I’m not concerned about it. Interest rates are just returning to the historical norm.
On August 18, the 30-year U.S. Treasury yield hit 5.339%, its highest since 2007, according to the Wall Street Journal. The last time the long-term Treasury yields were at this level, we were buying the first iPhone for $500, or $600 if you wanted 8GB. The 10-year U.S. Treasury yield hit almost 4.7% this week, which was near its highest level in over a year. None of these upward yield moves were sudden or shocking, despite the doom and gloom you are seeing on social media this week.
Besides the cheap iPhones, what else happened in 2007 and 2008? The financial crisis (where dumb bank loans were made without verifying income) crashed, causing the U.S. housing bubble to burst. The Federal Reserve (Fed) dropped rates to almost zero, and the government handed out tons of money to families and bailed out these banks to the tune of almost $650 billion.
What we are seeing now is rates near where they should be, and yields are finally going back to normal after the near-zero rate era following the 2008 financial panic. Today’s higher-than-recent yields reflect the unwinding of abnormal conditions.
The Fed is being patient and is supporting this situation. It has held rates steady for five consecutive meetings, even amid economic volatility, suggesting it would take something significant to raise rates.
Though it may sound frightening to say rates are higher than they’ve been in 20 years, the past two decades were an abnormal era. For all those people waiting for rates to “go back to normal.” This is normal, and what you saw in the 2010s and early 2020s was abnormal compared with long-term historical prices. The U.S. economy took a while to revert to normal, but it has not only survived but thrived with these higher interest rates.
No need to freak out; look at it through a wider lens and understand it is resetting the global financial system to its pre-2008 level.
My wife and I have been married just a few weeks shy of thirty years, and we have weathered several storms. I don’t worry about them anymore. Sure, we have a nicer house and more financial flexibility to deal with damage, but that isn’t the reason I no longer worry. After so many years, you realize storm damage is rare, and nowadays we enjoy listening to a good storm while we read. It is the same with investing. I guess I have been doing it long enough to have a broader investing worldview, understand what normal really is, and know that a balanced portfolio is pretty storm-resistant. At this point in my career, it takes a lot to rattle or surprise me. The current yields don’t do either.
Have a blessed week.
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This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
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Source: https://www.wsj.com/finance/investing/bonds-are-getting-hammered-and-wall-street-says-the-rout-wont-end-anytime-soon-895e0ad8?mod=Searchresults&pos=11&page=1
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