Markets and Economy Rising Treasury yields: Recalibration, not rupture

My parents were fans of the TV show Sanford and Son. The Redd Foxx comedy aired on NBC from 1972 to 1975, ending just before I was born. I’ve never actually seen an episode, but that didn’t stop it from being part of my childhood. My parents quoted it constantly. Any time something went wrong, or we surprised them in ways children tend to do, they’d clutch their chests, lean back, and declare, with theatrical distress, “It’s the big one. You hear that, Elizabeth. I’m coming to join you.” Of course, neither Fred Sanford nor my parents were having heart attacks, but instead overreacting to situations.

I found myself thinking about that line last week.

What rising Treasury yields may mean

US Treasury yields moved higher, and the reaction in parts of the investment community felt familiar.¹ There was a sense that this might finally be it. The long-anticipated break in the Treasury market. The moment when deficits matter, when buyers disappear, when rates surge well beyond growth, and valuations adjust across all asset classes. In other words, the “big one.”

The idea isn’t new. I’ve been hearing some versions of it since the beginning of my career, nearly three decades ago. The argument has always been that US debt is unsustainable and that interest rates must eventually reflect that reality. And yet, here we are with the feared break not materializing.

The recent move in rates is worth unpacking because the drivers of the move matter. If this were truly the “big one,” we’d likely expect to see inflation expectations become unanchored. Despite the surge in energy prices,² that hasn’t happened. Inflation expectations have remained relatively contained.³ That’s an important signal. It suggests that many investors still have confidence that inflation can be managed over time.

Instead, the move higher in yields appeared to reflect a combination of modestly stronger growth expectations and an increase in the term premium. The growth component isn’t surprising when viewed through the lens of earnings. US corporate earnings have remained resilient so far, reinforcing the idea that the economy has remained on a solid footing.⁴

The term premium story is more nuanced. Part of the adjustment seems tied to the belief that the Federal Reserve (Fed) may need to keep policy tighter for longer or even raise rates further. Markets are recalibrating around that possibility.⁵ But here again, there’s a reason for skepticism. With long-term inflation expectations still contained, it isn’t clear that the Fed will ultimately need to lean as aggressively as the market has considered.

Why the broader market response matters

Perhaps most importantly, the broader market reaction doesn’t align with a true stress event in my opinion. Treasury auctions have generally been absorbed without issue,⁶ which I believe argues against the idea that many investors are stepping away from funding US debt. The US dollar has been strengthening this month, which typically doesn’t suggest a loss of confidence in US assets.⁷ Also, credit spreads remained tight, an indication that investors aren’t demanding significantly more compensation for risk.⁸ And stocks have been able to digest higher rates without significant disruption.⁹

With apologies to Redd Foxx, this doesn’t look like the big one to me. What we’re seeing looks more like a recalibration rather than a rupture. I suspect that higher gasoline prices are likely to act as a drag on growth in the coming months, which should, over time, help bring rates back down. And it’s worth remembering how Sanford and Son ended. Not with Fred Sanford succumbing to one of his many dramatic episodes, but with him delivering a valedictory speech at his high school graduation. The “big one” never quite arrived.