Global Bond Rout: What Rising Interest Rates Mean for Your Money

Video Chapters & Transcript:

Well, howdy folks and welcome to yet another edition of Smarter Money Matters. Uh, it really does with your wealth doctor Jeff Camarda joined by super CFPs Lou and Anna. And today we’re going to focus on is a lot of changes going on in the global economy as we mentioned in a recent podcast and uh um interest rates are going up spiked by inflation I think and what’s happening with the uh the the war um in the Middle East. Uh so this is a recent Wall Street Journal article called the global bond route and what it means for your money uh markets and the future. Uh and so let’s get in. Obviously, you’re joined by Jeff. I’m the on the macro strategist and chief wealth educator. Anna is a curious analyst connecting ideas to everyday investors and old new practical market veteran, riskfocused commentator. Would you say that’s reasonably accurate, folks? Sounds right. Well, welcome back to the show, everybody. And today we’re diving into something that sounds technical but can really impact literally every investor that’s watching this, homeowner, retiree, or business owner listening right now. The accelerating global bond routes. Now, I know bonds don’t exactly sound that exciting or sexy exciting or sexy, but when bond markets move violently, everything else starts shifting too. Mortgages, stocks, business borrowing, even the economy itself. But according to this recent article, the global bond market selloff is intensifying. And what that means is when interest rates go up, the value of bonds goes down. With US Treasury yields surging towards levels we haven’t seen in years, maybe decades. I think the 10 years up around 5% last time I looked. So, so today we’re going to unpack why bond yields are suddenly spiking. what war and inflation fears have to do with it, why investors are having flashbacks to 2022, which as you may remember was a pretty nasty little bare market, and what this means for stocks and retirement portfolios, and most importantly, what smart investors should do now. Anna Louu, great once again to have you here. And let’s turn it over to Anna. Yeah, Jeeoff, thanks. I think this topic is incredibly important because most people don’t realize the bond market is really the foundation underneath the entire entire financial system. Lou Yeah, exactly. I mean, people watch the Dow every day, but the bond market is where the real pricing of money happens. And when bonds start to break down, borrowing costs rise um significantly. So, what’s really happening? Let’s start with the headline first. The article says a 10-year Treasury yield climbing to 4.7% with a 30-year Treasury moving above 5.2% which is almost a 20-year high. Now remember, when yields rise sharply, bond prices fall sharply. And the selloff isn’t isolated to the US, it’s global. It’s happening around the world. Anna, would you explain why this matters to these folks? Yeah, so government bonds are considered the risk-free benchmark of the financial world. everything else is priced off of them. Things like mortgages, business loans, credit cards, corporate debt, and even stock valuations. So when those treasury re yields jump, the cost of money rises across the entire economy. And the article points out that this is happening during a period where stock markets have been rallying hard um especially tech stocks tied to the AI boom. Some would say, you know, way inflated bubble territory bound to burst. This could be fuel on the bubble fire. blue. Yeah. And that’s important because rising uh yields um eventually complete, you know, compete with compete with stocks. And so we So say that again, would you please? Sure. And that’s important because rising yields eventually compete with stocks. If investors can suddenly earn 5% on government bonds, they start saying why am I taking stock market risk and and then pricing uh that the pricing process can create real pressure in equities. So I’m an investor say gee wiz I’m hoping to get a 5% dividend yield maybe a little appreciation stock and if I can get that much on a safer investment like bonds maybe buy I sell my stocks and buy bonds right so exactly this is where people often misunderstand the market stocks don’t exist in a vacuum the price investors are willing to pay depends heavily on interest rates when when rates rise future profits become less valuable borrowing becomes much more expensive corporate growth slows consumers spend less That’s why the bond market matters so much. So let’s you know kind of seg into the war factor here. The article says one major catalyst now is the US Iran conflict which really shows no signs of abating at this point and disruptions around the straight of Hormuz. Lou would you explain the connection between geopolitics and bond yields? Sure. So energy for example is so the the straight of Hermuz is one of the world’s mo most critical oil shipping routes and if conflict disrupts oil flow oil prices spike and when energy prices rise sharply transportation costs rise manufacturing costs rise uh consumer prices rise and that creates inflation pressures. Yeah. And and and suddenly the market starts thinking the Federal Reserve may not cut rates after all. Um the article says that investors have dramatically shifted expectations, moving from expecting rate cuts this year to potentially rate hikes. Um and that’s a huge psychological shift. Exactly. Markets are forward-looking machines. If investors believe inflation may reacelerate because of energy costs, they demand higher yields immediately. And remember, bond investors aid inflation because inflation destroys the purchasing power of fixed investments. Slooh. Yeah. Which is why yields can spike violently uh during inflation scares. So yields can go up dramatically when when people are scared about inflation. Is that right? Absolutely. Yeah. And bond investors, what are they saying? Uh well, you know, if if inflation is going higher, you need to pay me more, you know, to lend you money. That’s exactly right. People don’t realize that bonds, if I buy bond, I’m lending money to the issuer of the bond. That’s a transaction. That’s why they call it debt. So, one of the most fascinating parts of this article is a psychological component. The article quotes a JP Morgan portfolio manager saying, “Inves investors now have PTSD from 2022, post-traumatic stress disorder.” Right. So, Anna, what does that really mean? Yeah. So, 2022 shattered assumptions, right? For years, investors believed inflation was temporary, rates would stay low forever, central banks would always come in and rescue markets. And then suddenly inflation exploded. The Fed hiked rates aggressively and then both stocks and bonds fell together. That was shocking because traditionally bonds in a portfolio were supposed to cushion stock declines but not always right Lou. Yeah. Instead in 2022 that became one of the worst bond years in modern history. And u institutional investors still remember that pain. So now whenever inflation fears reappear, bond traders react much faster and much more aggressively. Well, that’s uh that’s that’s kind of getting for both barrels. It’s such an important point. Markets are emotional systems. No matter what the color graphs and numbers say, they’re run by people, you know, and people are wacky, crazy, emotional, right? Recent trauma changes investor behavior. It’s called recency bias. And what we’re seeing now may partly reflect fear that the Fed could again be behind the curve. So let’s talk about some of the global fiscal worries now that we move into another issue um that has mentioned what’s happening around the world. The piece mentions rising yields not only in US also in Japan like Japan is selling you know treasuries buying Japanese bonds by that happens since I was in high school I don’t think uh but also in Japan and and the United Kingdom Lou why are investors suddenly so violently worried about government debt levels again? Yeah, because uh you know governments ac around the world worldwide are borrowing enormous amounts of money and investors are starting to ask how much debt is too much you know how much is too much and and uh when supply of bonds explodes governments must you know attract buyers government you know buyers demand higher higher yields and then financial cost rises further so it becomes a dangerous vicious cycle yeah I got to tell you on the podcast you know government debt levels are like crazy high the US government now owes more money than it did after paying for World War II. Let that sink in. Let that sink in. The enormous cost and there’s no end inside. It looks like it’s going to keep going up up up and up and up. Anna? Yeah. So, the article specifically mentions fears that the world is becoming swamped with bonds. And that’s powerful language. It matters because if governments must constantly issue more debt to fund spending, investors may require higher compensation indefinitely. which is why enormous long which has a enormous long-term implication for decades investors benefit from falling interest rates like since I don’t know um the when when did the rates spike in 1982 something like that you know I was just getting out of college that that boosted stock valuations bond prices real estate values private equity venture capital interest rates went down all the rest of the stuff went up but if we and if things have we’re at an inflection point if things are starting to go the other way. If we enter a structurally higher rate environment, asset um pricing models may fundamentally change for a long time. These things, you know, when they change, like I said, you know, interest rates went up till about 81 or 82. And how long has that been? Help me with the math. 45 47 years, something like that, maybe a little long. So, what does this mean for stocks? The article notes that the S&P 500 recently fell about 2% over three trading days while NASDAQ also weakened. Anna, why are higher yields and that was just kind of a gut punch. It’s really just kind of an emotional reaction. You know, it I think it’s getting worse. But Anna, why are higher rates particularly dangerous for growth stocks? So growth stocks like a lot of technology stocks depend heavily on future earnings. When interest rates rise, those future earnings get discounted um away more aggressively. that hurts valuations. It’s especially problematic for tech companies, AI related stocks, speculative growth companies which you know these investors and those companies were paying very high multiples based on you know optimistic future growth. Yeah, that that’s that’s a that’s very important point. There’s another factor too though. Yeah. And then other factor is higher real yield. So, you know, article points out that tips uh not uh inflation adjusted inflation adjusted bonds yields which are inflation adjusted like you said have been rising too and that’s important because rising real yields often pressures stocks even more than rising nominal yields. Exactly. Exactly. If inflation rises but real yields stay low, stocks sometimes tolerate it. But when real borrowing costs rise, companies are having to pay more in their bonds and pay more interest. you know, to fund their expansion that tightens financial conditions really, really fast and historically that can eventually slow down economic growth. So, what should investors do now? Let’s get practical. What should investors actually do in an environment like this? Lou, why don’t you start us off? Yeah, absolutely. So, so first thing to to look for is to be, you know, to avoid emotional reactions. Uh, bond volatility doesn’t automatically mean a cat catastrophe. uh you know but investors do need to reassess risk exposure especially you know if they’re exposed to long duration bonds uh speculative growth stocks like Anna was pointing out earlier and then overleverag investments as well yeah I’d also add um diversification is important periods like this remind us diversification matters things like value stocks cash reserves money markets shorter duration fixed income and and targeting quality business with strong cash flow these areas often will hold up better when rates rise and and I’d also add tax strategy, you know, my favorite topic and cash flow planning become even more important. Higher rate environments punish inefficiency. Families carrying unnecessary debt, expensive taxes, concentrated risk, illlquid investments can suddenly feel enormous maybe back baking pressure. This is why holistic wealth planning matters so very much. Yeah. And investors need to remember uh you know markets repric faster than economies and sometimes markets panic before fundamentals fully deteriorate. So discipline matters and context matters too. The article actually points out one positive interpretation. Higher yields may partially reflect confidence and economic strength. Strong employment data and resilient consumers can also push yields upward. So, this isn’t a necessarily an immediate uh recession signal, but but it certainly is, you know, a gut check to make sure. It’s a great point. The challenge really separating healthy economic strength from destabilizing inflation pressure. And again, put that on top of the transformation of AI, crazy valuation. SpaceX is, you know, about to come out of or has come out. uh when you see this the fact that you people you know the job market is shifting inflation is spiking there’s a lot of things going on that they’re really complicated and markets are really wrestling with these questions in real time so final round rapid fire takeaways one sentence each what’s the biggest takeaway a listener should remember Anna yeah I would say you know bond markets drive the cost of money and when yield um yields rise fast every single asset class has an impact. How about Lou? What’s uh what’s your takeaway? Yeah, I mean the world may be entering a structurally higher rate era and investor needs to adopt in instead of assuming that the last 15 years will repeat and mine is the environment really rewards disciplined tax efficient riskaware investors not crazy speculation. So you know one thing that I’d like to uh to kind of add is this is really important particularly for non-comm clients that you know most advisors you know were kind of wetted to the I think outmoded if it was ever even um the accurate you know textbook portfolio 6040 in stocks or 5050 whatever and the rest in bonds and you got to remember it’s conditions like this where you have overvalued stocks and arguably Overvalued bonds could risk a double whammy. You know, but usually these are combined because when one goes up, the other one goes down and in many periods that’s happened, but you get, you know, when you get the right mixture of factors, it could blow up in your face. You have to be careful. Anyway, on that cheery note, thanks everybody for joining us. If you enjoyed the conversation, please share it with somebody trying to make sense of today’s markets and uh and uncertainty. Remember, wealth isn’t built by reacting emotionally to headlines. It’s built by understanding the forces underneath them. We’ll see you next time. Thank you so much. Once again, Super CFPs, Asmatic, Anna, hopefully only briefly, and and Lou, and of course, me, Jeff Camarda. Bye-bye, guys.