All Eyes on the Five-Handle
- cornerstoneams
- 5 days ago
- 4 min read
The bond market has been getting a bit nervous of late. This nervousness is displayed via price action that is picking up in volatility as well as some downside price action overall. With the inverse relationship of prices to interest rates, as prices have declined, interest rates have moved higher.
As a general statement, this has been true across the bond market spectrum.
For our part, within numerous editions over recent years, we have been focused on the long-standing megatrend that ended over 5 years ago in an important segment of the bond market. Like all megatrends, once they end, few realize they have actually ended until many years have passed by.
The megatrend in question is the multi-decade trend of ever-lower interest rates within the treasury market.
To date, most are unaware that said megatrend is over. Many still seemingly believe this is a short-term blip even though 5 years have passed by on this new trend. It takes time for collective psychology to adjust.
A few years ago, in our initial sharing of the end of this megatrend, most thought we had lost our minds. To be fair, it was not an opinion of ours but rather factual market-based data that was calling an end to the megatrend.
Our focus is the benchmark 10-year Treasury note because it impacts other interest rates in the economic system. As an example, mortgage rates are impacted according to the general direction of the 10-year treasury.
The 10-year, on a yield basis (think interest rate), had a rock-solid downtrend in place that began way back in 1982.
At that time, anyone suggesting that the megatrend of ever higher rates was ending, and, in-turn, would usher in a multi-decade trend of ever lower rates was certainly viewed as having questionable mental faculties.
Prior to 1982, the same 10-year had been on a multi-decade megatrend of ever higher interest rates. The masses had become so accustomed to that trend, the thought of a trend in the opposite direction leaned toward lunacy.
So there it is: megatrends die hard, both in their actual trends and even harder through the acceptance of such in collective psychology.
The 5-handle is too close for comfort
Above is our often-shared megatrend chart of the 10-year treasury which dates back to the mid-1970s.
Along the path of recent years, we have shared this chart within many editions. To the far right of the chart we have added a new blue line marker that identifies the 5% level for this treasury security.
We are not there currently, but as shared at the outset, the bond market in general has been getting a bit nervous. This includes the above 10-year treasury notes.
If the above eclipses the 5% level, it will be a new cycle high in this multi-year uptrend process. Furthermore, that level, if attained, will take us back to mid-2007 interest rate levels. With a bit of rounding, let’s call that a 20-year high.
Psychologically, that will be an important number, both in light of the 5-handle being taken out to the upside along with the fact that it is a two-decade old level.
The deficits offer no letup in sight
Above is a 21st century view of the federal government’s annual deficit results. Each bar represents one fiscal year. The government’s fiscal year ends September 30th of each year.
Our red rectangles are highlighting periods of annual deficits that are close to or eclipse $1 trillion. Outside of our highlight boxes, there are a few years that are at or come close to $800 billion.
Place these bars together, and we see how the well-recognized federal debt is off the charts.
Our more current era, identified by the right rectangle, has been posting consistent $1.5 plus trillion dollar deficit levels. Currently, up through April of 2026, the federal deficit is running close to $1 trillion with five months to go until fiscal year 2026 comes to a close.
We could say that we are right on track for another year of trillion-dollar-plus deficit spending results. We will know with certainty in a few months.
The above offers no letup in continued increases in debt issuance brought to market by the government.
Couple this with our continued sharing on the price inflation backdrop, and you have an ongoing recipe for collective bond market participants demanding higher interest rates in order to be incentivized to purchase and hold government-issued debt instruments.
Add to the above, the recently updated quarter-end result of the government’s interest payments on the accumulated debt equals an annual run rate of $1.2 trillion dollars. That is $1.2 trillion paid on interest alone.
As a reference point, it was just back in mid-2019 that we had attained a then-high point for interest paid on the debt of $578 billion. At that time, $578 billion spent on servicing interest only was viewed as unfathomable. That was just before a short dip that was easily eclipsed with a relentless trend to current levels.
The 5% level for the important 10-year treasury seems inevitable unless somehow government spending becomes more in line with tax receipts.
On the price inflation front, as we have shared in recent editions, the upward trend that is getting noticed now actually began to form nearly a year ago. The point to this observation is renewed price inflation is not war-related only. It has been simmering on the burner, if you will.
If trillion-dollar deficits along with price inflation continue to be viewed as acceptable policy stances, we should expect the bond market in general to be cautious at best. In terms of the 10-year treasury, it will not take much more of said deficits and inflation to see the 5-handle challenged.
If the 5% level is attained and exceeded, it will be very interesting to observe the reaction of various markets to that notable change. For us, this is one market-based metric that is high on our “watch closely” list. We will share more on this as developments unfold, be they up or down.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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