It Started: The US Debt Bomb Just Imploded

You are going to see a crack in the bond market. Our fiscal situation is a 350 pound two pack a day smoker on the ICU table. The US federal budget is on an unsustainable path. We're now officially paying the US government paying more than 5% interest to borrow money for the next 30 years. We're going to be broke. I'm telling you, it's going to happen and you're going to panic. What's up you guys? It's Graeme here. So, uh, this is pretty bad. For the first time since the great financial crisis, bond yields have just risen above 5%. Mortgage rates are skyrocketing, the stock market's falling, and pretty soon we could actually see the beginning of the unthinkable. A world where the safest investments in America become the biggest threat to everything else. Like, keep in mind, for the last 15 years, our entire economy was built on the concept of cheap money. Homes got more expensive because people could borrow more. Stocks went higher because there was nowhere else to put your money. But now that entire system is reversing and stocks are facing a major problem. Because why would you invest when the government is giving you more than 5% to do nothing? That's why we really have to talk about why bond prices are collapsing, why 5% is the magic threshold that could break our entire economy, and then most importantly, how this is about to affect you, your money, your job, your house, and even your investments. Because this could be the moment that everything starts to go to Although before we start, if you appreciate the last minute breaking news these videos like this, all I ask is that you break the like button and subscribe if you haven't done that already. It's all I ask. It helps out tremendously and as a thank you for doing that as usual. Here's a picture of a chicken. So, thanks so much and also big thank you to SoFi for sponsoring this video, but more on that later. All right. So, in order to understand what's going on and why interest rates are spiking to levels that we haven't seen since the great financial crisis of 2007, we need to talk about the two words sending chills down every investor's spine. And that would be bond yields. See, anytime the United States needs money, it issues what's called Treasury bonds, which basically just says, "Lend us your money today and we'll pay you back a fixed consistent interest rate, and then at the end of the term, we'll pay you back your original investment that you gave us." Generally, this amount is seen as a risk-free rate of return since realistically the government's never going to default on their debt. So investors, pension funds, endowments, banks, institutions, they all buy treasury bonds as a safe place to store their money. Except in this case, bond prices are collapsing. Why? Well, here's the part that a lot of people miss. Bond prices and bond yields move in opposite directions. So when an investor wants to buy bonds, bond prices go up and yields go down. But when investors start selling bonds, bond prices fall and those yields go up. Or if that sounds super confusing, just imagine that a bond costs $100 and pays $5 in profit for a 5% return. Well, if a lot of investors are buying that bond, maybe the price goes to $125 for that same $5 profit. In this case, the return drops to 4%. But maybe if demand is really low, investors will only pay $80 for that same $5 of profit, which works out to a 6.25% return. That's why anytime you see a headline that says yields are spiking, all that means is that people are selling off government debt and demanding a higher return to lend their money, which you guessed it is a warning sign because if the safest borrower in the world suddenly has to pay more money, then everything else in the economy has to adjust around that new number. Like once investors can earn a risk-free 5% return, they begin to ask themselves, why buy an overpriced stock? Why buy real estate? Why lend money to a struggling company? Why invest in anything unless the return is meaningfully higher than that? And really, when enough investors start asking themselves that same question, everything begins to fall. And uh that's what we've begun to see. Now, unfortunately, this is just the tip of the iceberg because the largest borrower in the entire world is the United States. And when yields go higher, the more expensive it becomes to maintain the national debt, which you guessed it, when their loans come due, they have to refinance and get new debt at a much higher interest rate, which costs them more money, which causes them to have to borrow even more and pay even higher interest. And this just carries on over and over and over again until eventually something snaps, which leads us to the bond collapse. Like, here's the thing. Bond prices are only falling because investors are no longer willing to lend money at the same rates that they used to accept. Like sure, a few years ago, maybe earning 3% was pretty good, but today investors are looking at inflation, government spending, rising deficits, and the massive amount of debt that constantly needs to be refinanced. Not to mention, there are three specific forces all about to hit the market at the exact same time. Starting with number one, inflation. In this case, last week CPI jumped 3.8%. 8% year-over-year, the highest reading since May of 2023. And PPI, which measures wholesale inflation, as in the inflation that businesses pay before it hits the customer, rose 6% year-over-year, the fastest pace since 2022, implying that inflation is coming back faster and stronger than ever, mainly the result of number two, oil. In this case, the conflict throughout the Middle East caused oil prices to spike past $100 a barrel. And with the straight of Hormuz still not fully operational, oil prices are only expected to go even higher. Plus, this doesn't just affect gas prices. Higher oil literally flows throughout the entire economy. We're talking shipping, trucking, manufacturing, food production, and more. So, when oil spikes this much, inflation eventually follows, which is not helped by number three. The government is flooding the market with debt. The fact is, we are running roughly $2 trillion a year in annual deficits. We are spending significantly more than we make. And this means that the Treasury has to constantly issue new bonds to raise more money to pay for the debts that we just don't have the money for. On top of that, Japan, who is the largest foreign holder of US treasuries at 1.2 trillion, has even less incentive to buy the United States right now because their own Treasury yields have risen to their highest level ever in history. This means that if fewer investors are willing to buy US debt, unless they're paid more money, then yields have to increase to a point that causes investors to eventually step back in. But higher yields put additional pressure on the stock market, the housing market, and the government's own budget. That is when this becomes the difference between a bond market problem and a full-blown financial crisis. On top of that, this is also why assets like cryptocurrency have become a part of the conversation. because when investors begin questioning the long-term value of inflation, debt, and money, they begin looking into assets outside of the traditional system. So, in terms of what's most likely going to happen next, you're going to want to hear this. Although, before we go into that, I have to say when it comes to something like crypto, how you're buying it matters just as much as the investment itself. Because the biggest difference between a good and bad experience usually comes down to how you're actually buying and holding it. That's why having something simple, secure, and backed by a trusted platform makes such a huge difference. And our sponsor, SoFi, is there to help. For those unaware, they are the first nationally chartered bank where you could buy, sell, and hold cryptocurrency all from one app. With access to over 25 different cryptocurrencies on a federally regulated platform with the safeguards of a bank. On top of that, everything is in one place. So instead of juggling multiple apps, you could manage your crypto right alongside with your checking, savings, and other investments. Plus, if you're just getting started, they even have inapp guidance to help you learn as you go, so you're not guessing or trying to figure it out haphazardly. Of course, crypto is inherently risky, and you got to make sure it actually makes sense for your situation. But assuming you are interested, doing it on a platform that's simple and secure just makes the entire process a lot easier. So, if you want to check it out, just go to sofi.com/gram with a link down below in the description. And from now until June 30th, new crypto members could grab up to $1,000 to kickstart their crypto. Again, that's sofi.com/gr to get started with the link down below. Thank you so much. Now, let's get back to the video. All right, so in terms of what's happening, what this means for the future, and then most importantly, what you could do about it, it's really important to understand how these events have played out in the past. Because first, we have the 1994 great bond disaster. This occurred just over 30 years ago when yields were low, inflation was under control, and everything seemed fine. But then the Federal Reserve started raising interest rates faster than expected. And that caused the bond market to completely collapse. In fact, the yield on a 30-year Treasury spiked from under 6% to above 8% in a matter of months. Mortgage rates saw a 30% increase. Bond investors lost over a trillion dollars. And what's crazy is that absolutely nobody saw it coming. The same thing also applies to the 2023 banking crisis. Back then, the 10-year Treasury briefly passed 5% as investors grew concerned about rising inflation, but this left banks with massive unrealized losses from the bonds that they had bought when rates were much lower. As a result of that, the stock market fell over 10% with some of the banking stocks falling as much as 50%. But just like the previous 1994 bond market collapse, after a while, rates stabilized and everything resumed as normal. In fact, according to Yahoo Finance, in each of the four times the 30-year neared or broke 5% over the last few years, stocks took a short-term hit, only to recover once yields dropped back. This means that historically 5% has acted as a ceiling where yields never really get much worse than that. But today, people are worried that 5% is now going to be the floor. And if this happens, there are four very serious concerns for the entire economy that everyone needs to be made aware of. First, we have the government debt spiral. In this case, the United States already pays over a trillion dollars a year in interest on the national debt. Every 1% increase in yields adds tens of billions of dollars to the interest payment, which crowds out other spending and makes the deficit wider, which requires more borrowing, which makes the deficit worse, which increases interest rates even further, which then requires even more borrowing. On top of that, if the Federal Reserve lowers interest rates anyway, that could lead to even more runaway inflation, which pushes yields higher either way. So, uh, they're kind of stuck. Leading to number two, stocks come under pressure. But here's the reality. When the government is paying you 5% risk-f free to basically just do nothing, stocks look a lot less appealing. Because when the stock market is averaged 7%, but you could go through a lot of volatility, there's not as incentive to risk your money in the market when you could just get a little less guaranteed and not have to worry about it. This is also why a lot of high growth tech companies get hit the hardest because when rates go up, your future money is worth a lot less compared to what you could just get locked in today. On top of that, third, the housing market freezes further. Anyone who bought in the last two years and locked in a rate above 6% is likely underwater on their mortgage when you account for commissions and closing costs. And anyone who bought at 3% years ago is not going to want to move and get a new mortgage at 6 12 to 7% when that would cost them more than double what they're currently paying. This keeps inventory locked up, keeps prices sticky, and makes first-time home buyers work a lot harder to get the exact same house. And finally, fourth, the higher these yields go, the faster corporate America seems to slow down. The truth is, higher borrowing costs means that companies delay investment, pause hiring, and their earnings compress. So, the economy doesn't just break overnight. It slowly grinds to a standstill, while the odds of a recession quietly tick upwards with every basis point increase. So, in terms of what this means for the average person, here's what you need to know. First of all, with treasuries now paying a risk-free 5% return, I'm sure a lot of people want to know, "Hey, Graham, is now a good time to lock in those guaranteed risk-free 5% profits?" And my honest answer is, if you're looking for a safe, stable, long-term return without going and trying to chase stock market returns for outsized profits, then yes, potentially buying treasuries right now isn't that bad of a deal. like for retirees, people saving short-term for a house, or someone who just wants liquidity on the sidelines just in case, earning 5% at these levels is uh not that bad. However, the expectation is that even today, your 5% profit is going to be eaten away by inflation, rising government debt, and money printing. And long-term, over the next 10 to 20 years, you could wind up earning significantly less than had you just thrown the money in the stock market and done nothing. The treasuries are really just designed to preserve capital and generate a little extra income, not maximize wealth. So even though a 5% return seems pretty attractive, stocks have historically offered significantly higher returns because you're compensated for the additional risk. That's why if you move too much money into bonds just for the 5% yield, you could protect yourself from short-term volatility, but most likely at the expense of a lot of long-term growth. And it's something everyone has to keep in mind. On top of that, not all bonds are created equal. For example, short-term treasuries like three month, six month, or one year are closer to cash. They're really valuable if you want flexibility and don't want to lose too much value. But long-term bonds like 10 or 30 years are completely different and they could lose a significant amount of value short-term if yields keep going even higher. So, in terms of what I think about the bond market crisis and what this means for you, here is what you came for. As of right now, UK's yield hit the highest level since 1998. Japan's yield reached the highest level ever in history. The US 30-year is at a point that we haven't seen since 2007. Rate hikes are back on the table. And yeah, the bond market is breaking. But just from what I could tell so far, this is not the same as 2007 where a corner of the mortgage market just brought down the entire economy. Instead, this one is a lot slower, a lot more boring, and in some ways actually a lot more dangerous because it's affecting pretty much everything at the same time. For instance, like I mentioned earlier, higher bond yields means that the government pays more to borrow money, which just adds to the national debt that we already can't afford to begin with. On top of that, mortgages stay higher for longer. Companies refinance at higher interest rates. Stocks have to compete with a guaranteed 5% return in treasuries. And consumers then have less money left over after paying for credit cards, auto loans, insurance, and everything else that's going up in price. That's why no, I don't think this means the market's going to collapse tomorrow morning. And maybe you could go back at this and it ages terribly. But I do think that this is a sign that the free money era is really coming to a bit of an end, at least for the foreseeable future. And as a result of that, everything has to readjust to a market where interest rates are staying high for longer. To me, the most realistic outcome here is not a sudden market crash that no one sees coming, but instead a slow constriction of the financial system that's probably going to result in either of these two scenarios. First, we could see inflation slowly subside and yields come back down on their own. Or yields keep going up and eventually the Federal Reserve has to step in. However, there is a bit of a catch here because if the Fed steps in too soon and lowers interest rates before the economy could handle it, then inflation could get a lot worse. But if they wait too long, they risk letting higher interest rates hurt the economy, which also has its own consequences. So, in terms of what you should do about this, I tend to think that this just means you should stay flexible. Don't take on too much leverage. Don't take on too much debt. Don't assume that these high interest rates are going to disappear tomorrow. Don't put money that you need into long-term bonds that could be pretty volatile. And also, don't sell off stocks just because they're falling in value and you get scared. Like, historically, moments like this when everyone's panicking tends to be the point where the market begins to price in a solution. But until that happens, the bond market is sending a very clear message. And that's the fact that interest rates can't stay higher for longer. And the biggest risk is that if 5% becomes the new floor instead of the prior ceiling, that's when we got problems. Which is why it's extremely important no matter what to hit the like that already. And also, before I forget, if you want bonus videos every single week that I don't post publicly because some of them are a little too niche for the YouTube algorithm, feel free to join as a channel member. And on top of that, if you leave a comment as a channel member, I see each and every one of them. In fact, I actually get notifications on my phone when a channel member comments. So, if you want to see bonus videos and I'll do my best to respond to each and every one of your comments as a channel member, feel free to join. Helps out a lot. Enjoy the extra content. Thank you so much and until next