The Terrible Twos
If you are a parent or grandparent, the odds are that you have had to deal with a child going through the time in their lives lovingly referred to as the “terrible twos.” Parents who have lived through this will confess that it was not much fun. During the terrible twos, the main choice of word for a young child is “no.” Moreover, the child realizes for the first time that they control the room and the narrative. So, how is an observation of child development relevant for this Weekly? The answer lies in what is currently happening in the global bond markets and interest rates.
Surprisingly, some market commentators seem shocked that the cost to borrow money is rising. The news is full of stories about the impact of rising borrowing costs, whether it be for government debt or for data center buildouts. Headlines this week include a looming crisis in French debt and problems for the African nation of Gabon. What are we going to do as the angst continues to rise?
Having raised two children and currently having three toddler grandchildren, I am reminded of similarities in the current bond market and the actions seen during the terrible twos. The market seems to behave as if we have never seen interest rates rise this much and the world cannot possibly manage it. That is far from the truth. Since 1977, the average yield on a 10-year U.S. Treasury note has been about 5.20%. As I write this piece, the current 10-year is yielding 5.22%. The range of yields on the 10-year during the last 50 years was a low of 0.89% during the great financial crisis in 2020 to a high yield of over 15% during the inflation crisis of the early 1980s. Interest rates change, and yet somehow the story currently is that we might not survive this march to higher interest rates.
A toddler going through the terrible twos is not pleasant to be around. But for those that have lived through this time, you know things will get better. As a child ages, they communicate better, and we become less frustrated with dealing with them. Life becomes more normal and predictable. The same can be said for the world of interest rates. We are transitioning from a time of unimaginably low interest rates.
Just a few years ago, the world was one of short-term zero interest rates and 30-year mortgage rates of 3%. That wasn’t normal. When you borrow money, you naturally have a cost associated with that loan, which is the interest you pay. If you are a very creditworthy borrower, your rate should be lower than if you are a bad credit risk. That makes sense to me, but we were recently in a world where credit risk seemed to be overlooked. What is going on now is a return to normal, and unfortunately, like the terrible twos, the adjustment is not much fun.
Carl Gambrell