Expectation inertia is a powerful force. Thirty-year Treasury yields briefly exceeded 5 percent in 2023 before retreating. However, in recent weeks, as yields again climbed above that threshold, investors appear to be finally accepting that the United States is leaving the era of low interest rates and entering a new world marked by significantly more inflationary pressures than in the past.
Multiple Drivers of Change
There are several reasons for this shift. Higher energy and goods prices, driven by war and tariffs, are compounded by re-industrialization and rising defense spending. Additionally, the rapid expansion of artificial intelligence giants is consuming vast amounts of real estate, computer chips, water, and electricity, driving up costs across the broader economy. Weakening demand for U.S. Treasuries further exacerbates the situation.
Structural Factors at Play
Beyond immediate triggers, slower-burning issues such as mounting national debt, geopolitical tensions, and rising populism are also contributing. These risks prompt lenders to demand a higher premium for committing their capital over the coming years.
According to a recent client note from Apollo chief economist Torsten Sløk, investors should position for a persistently higher rate environment across the short, medium, and long term.
The End of the Cheap Era
In essence, we are witnessing the conclusion of an era defined by cheap everything. Over the past half-century, American growth has been built on inexpensive capital, labor, and energy. All major geoeconomic and geopolitical dynamics supported these conditions.
For instance, 30-year Treasury yields declined for nearly 50 years until recently, falling from the mid-teens in the early 1980s to around 1 percent during the pandemic. Former Federal Reserve Chair Paul Volcker initiated this trend with monetary tightening in 1979, but it persisted because all key macroeconomic forces were aligned.
Shifting Global Dynamics
Decades of globalization and technological advancements in manufacturing lowered the price of goods. A flood of petrodollars from oil-exporting nations created abundant cheap money. The privatization of retirement systems generated demand for new financial products, and foreign borrowers increasingly sought U.S. Treasuries as a safe haven.
Now, these vectors are reversing. Each Treasury auction attracts fewer international buyers. Decoupling and efforts by the U.S., Europe, and others to bring critical industrial capacity back onshore are likely to raise goods and services prices in the short to medium term, though they may enhance long-term resilience.
Investors and policymakers alike must adapt to this new reality, where cheap is no longer the default.
