00:00Hey everyone, it's Spencer Akimian and welcome back to another episode of What's Moving Your Money.
00:05I hope everyone had a very nice Labor Day and we are getting into the fall season.
00:10It's about to get very busy in the economics world.
00:13So I want to today spend our episode talking about the alarming rise in yields
00:20that we've been seeing both in the United States and around the world.
00:24Then I want to go into why this is happening despite of the fact that the Federal Reserve is beginning to cut interest rates
00:33and those rate cuts are already essentially all priced into the puzzle.
00:38What the root causes of this issue is and in fact why this is actually a repeat of the exact same thing that happened last fall.
00:48So we have a very busy episode. Sit back tight and I hope you guys enjoy.
00:54So around the world, but in particular in the United States, Japan and France,
01:02we have long yields spinning out of control.
01:0610 to 30 year bonds are rapidly falling in price in the past couple of weeks.
01:12And the reasons are multiple and they're nuanced.
01:16But for this purpose of this episode, let's just focus on the United States
01:20because that's where most of the audience is.
01:23We have simply too much supply of debt that we have to issue in the United States.
01:31Every year, our deficit, both in absolute terms and in relative terms, is expanding.
01:37We have the largest deficit in 2025 in any peacetime year since World War II.
01:44We are literally permanently spending money at crisis levels.
01:50We haven't spent this much money relative to our GDP that we did not have since 2008, since 2020, before that, since the Cold War.
01:59It is just a snowball effect.
02:01And what happens is that over time, the supply of bonds becomes much greater than the demand to buy those bonds.
02:11And just like any other market in the world, bonds are based off of supply and demand.
02:16When supply is much higher than demand, the price falls.
02:20And since we're talking about bonds, when the price falls, that means the yield rises.
02:25I want you guys to keep that in mind anytime we talk about bonds on this podcast.
02:31Price fall, yields rise.
02:33You can think of it the same way as a stock with a dividend yield.
02:35If the price falls on a stock and the dividend remains the same, well, then the dividend yield just rose relative to the price.
02:43So it is the same idea.
02:45And we basically have a problem in the United States where yields are spiraling.
02:51And it is going to affect you in many, many different ways.
02:55So let's get into that next.
02:57So the rise in long bond yields materially impacts your life because almost every loan that a consumer or a business or a family or a household can get is based off of 10 to 30 year bonds.
03:14It is not based off the Fed funds rate.
03:17This is a critical mistake that mainstream media does not talk about enough.
03:23The Fed funds rate is simply the overnight rate that banks charge one another.
03:28It often has little correlation to the long end of the yield curve.
03:32When you get a mortgage, when you get a car loan, when you get a credit card loan, when you get a line of credit for your business, when you want to get a loan on a real estate investment, this is all based off of longer duration bonds.
03:45The Fed funds has a minimal impact on that, especially when you are in a situation of fiscal dominance like we are in, where the front end of the yield curve is arbitrarily being pulled down by political forces, not by natural market forces.
04:01I want to ask you guys a question.
04:03Do you have any loans that are coming up soon?
04:06And if so, what duration are those loans?
04:09Because if you are planning to extend a 10 year loan, you are going to not benefit that much from these rate cuts that we are going to be getting soon.
04:18So let me know in our comments what you think about these rate cuts.
04:22Now, one other thing that we got to talk about in terms of Fed cuts is we don't have to wait as market participants for the rate cuts to happen for us to price it in.
04:35Everyone knows that the Fed fund is going to be cut one, two, potentially even three times in the balance of 2025.
04:42So if you go look at two year bonds, the yields have already fallen substantially because no one's going to wait for that to get confirmed.
04:51All of those trades get front ran.
04:52So oftentimes when you're in a situation where you are cutting interest rates, the stimulus, the benefit of that happens way before the cuts actually happen.
05:03And then ironically, what ends up happening is once the cuts end up actually occurring, it might become a sell the news kind of event where yields might actually rise.
05:13Although interest rates were physically cut on that day because it's already been priced in for months.
05:19So you have to consider that markets are forward looking price mechanisms.
05:23They already plan these things well ahead of time.
05:27Nothing in markets waits until exactly when it happens.
05:30It is all priced in from well in advance.
05:33So that is quite important to know.
05:35And now, if you guys think that any of this is novice or new, it's not.
05:40Even just go back only 12 months ago when the Federal Reserve aggressively cut by 50 basis points in September of 2024,
05:49and then another 25 in November of 2024, and then another 25 in December of 2024.
05:55The Federal Reserve cut their Fed funds rate by 100 basis points last fall from 5.33% to 4.33%.
06:04What happened to the 10-year yield in that exact same time span?
06:10It went up by 100 basis points.
06:13So the Fed cut by 100, and actual yields to the real economy went up by 100.
06:19If you go on my TikTok and on my Instagram, my handle is Spencer Akemian, you will see I made a video detailing all of this
06:27and how those Fed cuts from last year actually had a negative effect on the economy when it was all said and done.
06:34One thing that really, really I strongly want to stress, and then you have to consider it,
06:40is that, again, you do not borrow at the Fed funds rate.
06:45The Fed funds rate rarely impacts you unless you have a variable rate, one-year loan,
06:52a bridge loan that is based off of right in the front of the yield curve.
06:57This really is going to get through to you.
06:59If you are a participant in the real economy, if you are a business, if you are a household,
07:06if you are a homeowner, you have to look at the 10-year yield.
07:09You have to look at the 30-year yield.
07:11It is meaningless what the Fed funds does.
07:13Ironically, by forcing these rate cuts that possibly we don't need with all of this inflation that we have in our system,
07:22you actually end up adding inflation premium into the 10- and 30-year yield,
07:27and you end up raising real borrowing costs.
07:30This was the exact same mistake the Federal Reserve made last fall.
07:34They cut aggressively when they did not need to.
07:38Last fall, real GDP was growing at 3%.
07:41Real!
07:42That means 6% nominally, and the Fed still aggressively cut.
07:46And one that ended up happening, borrowing costs rose.
07:49Look, right now we have a weakening job market, but we have an inflation problem right now in the United States.
07:54And it's only going to get worse as these tariffs continue to progress and marinate into our system.
08:00By cutting rates right now, we are already seeing adverse effects,
08:04and I fear we are doing a repeat of September 2024 and September of 2025.
08:10And I want you guys to let me know in the comments before you go what you think.
08:14Are Fed cuts right now necessary?
08:16Are they a mistake?
08:17Do you think there should be some nuance around this?
08:19Let me know, and I can't wait to see you guys in a few days.
Comments