Why Every Trader on Earth is Watching the 10-Year Treasury Now with Nick Colas

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0:55The FM Accumulator Ultra Short Treasury ETF, ticker SGVA. SGVA is structured to avoid unwanted taxable distributions and harness the power of compounding inside the ETF. Instead of monthly distributions, you stay invested in ultra short treasuries and you choose when to redeem based on your personal cash needs. SGVA, built to grow, not distribute. To learn more, visit fminvest.com slash S-G-V-A. Well, well, well, here we are again. How are we doing, Nick? Very good. How are you? Good. Let me introduce the show real quick and we'll get down to business. Ladies and gentlemen, welcome to an all new edition of What Did We Learn?

1:43On today's show, we're doing, I think, the most important topic of the past week for investors, allocators, portfolio managers, hedge funds. This is the thing that everyone's looking at now that we are most of the way through earnings season. And we're very fortunate. I have my friend Nick Kolas here. Nick, along with his co-founder, Jessica Rabe, who is on the bench today for today's episode, not feeling great. But Nick is here. Nick is the co-founder of Datatrek Research and the author of Datatrek's morning briefing newsletter, which goes out daily to 1 ,500 plus institutional and retail clients.

2:24Nick and Jessica also have their own awesome YouTube channel. You can find a link to it in the description below. Welcome back, Nick. It's so great to see you. Great to see you. All right. You having a good summer? Very good. How about you? This is a really good one for me too. So I say this every year. This is the part of the summer where it's almost over, but you almost say to yourself, thank God, I'm having too much fun. I actually need to get back to work. So this is like that week for me usually. But we're here regardless. So I want to do this. I want to open this segment by just saying, typically, we talk about the stock market.

3:05Typically, what happens in the bond market doesn't really have much of an impact on the stock market or the sentiment in the stock market, because people just understand it's two different markets. Sometimes they fluctuate for the same reason. Sometimes they are doing their own thing independent of each other. However, right now, the treasury bond market has come back. It's the front burner of the market conversation because we're seeing some volatility there. We're seeing a lot of narratives being kicked around about what's causing it. And I think it's a great way for us to open up the conversation today.

3:39So Nick, you're talking about long-term treasury yields specifically moving higher. So let us know what we need to know.

3:48Nick Colas:Sure. I'm focusing right now on the 30-year treasury because that's gotten a lot of the press. It has broken out to plus 15, maybe 20-year highs in terms of yield. And there's a lot of confusion about what's causing that. So I pulled together a chart that we can start talking about. And this shows you 30-year treasury yields decomposed into inflation expectations and then the residual, which is called real interest rates. The nominal rates that you see on the screen, the 5.2%, 5.3%, can be broken down into how much inflation investors expect over the next 30 years per year. And then whatever is left over is called the real yield.

4:25Nick Colas:The red line, which is inflation expectations, has been dead flat pretty much for the last 15, 16 years. This chart goes back to 2010. And it goes between, you call it 1.5 % and 2%. It is a 2.5%. It is very stable. The market always knows inflation is coming, and it's very stable. Those expectations are very stable. What moves around a ton, meaning a ton, is real rates, what you have left over after inflation expectations. And they're the ones that have broken out. So instead of being, call it 2%, 2.5%, they're not pushing up on 3 % in the current environment. And that's the reason for rates being higher.

5:09Nick Colas:And it's super important. If we can just throw the chart back up for one more second. If you were an investor in TLT, which is a very popular long-dated treasury bond ETF out of iShares, you compounded at almost 8 % a year positive through the 2010s. It was a very good money-making investment. In the 2020s, because real rates have exploded from being negative to being very positive, Your CAGR, your compounded annual growth rate over this decade so far has been negative 4.4%. So this went from being a massive money-making trade, being long the long end of the curve, to being just very destructive to portfolio returns.

5:47Nick Colas:And the reason for that is entirely real weight. Let me just make sure everyone understands and just double-click on that real quick. a CAGR of 7.8 % a year on a portfolio of long-term treasuries, which effectively, from a credit perspective, are risk-free. The risk that you're taking is duration risk because the interest rates fluctuate. But to be able to earn 8 % a year from 2010 through 2019 led to a lot of allocators, including TLT or something like it, as sort of a permanent part of their asset allocation. That piece of the puzzle, that piece of the allocation in the last six years has been compounding at negative 4.4%.

6:38And that's for the risk-off asset. A lot of people thought TLT should always be included in allocations because when the market's getting killed or the economy's in big trouble, that should work really well to the upside as a hedge. Your hedge for an overall portfolio should lose money when times are good, and it's worked. But I think a lot of people are now looking at that and saying, maybe that's not the exact hedge that I want going forward.

7:08Nick Colas:Yes, precisely so. And by the way, those returns are with coupons reinvested. So that's your total return. That's just sitting there with the asset reinvesting. So it's been tough. And look, that trade even worked in 2020 when everything was falling apart in the pandemic. TLT was rallying. It was the anchor for a lot of portfolios. It just has been destructive since. Yeah. Okay, go on. Okay, so that takes care of the picture. Now let's talk about what's going on with the next slide. And here we kind of break down what is the actual reason for real rates being high and climbing. And there's, I think, four that are important.

7:44Nick Colas:First of all, they were very artificially depressed by the Fed, purposefully so in the early 2010s and 2020s because of quantitative easing, bond buying by the Fed to bring real rates down. The Fed did that and it worked fantastically well. They got real rates super negative. That incurs a lot of investment. So mission accomplished. This is the unwind. This is the unwind. So now we did the unwind and now we have a very stable Fed balance sheet with no bond buying. The second, and I think a theme that we're going to touch on a couple of times in this conversation today, is there's been no recessions since 2020 despite a whole range of shocks.

8:19Nick Colas:2022's aggressive rate hikes, 2025's U.S. trade policy shock, two different oil shocks in 22 and 25. And the inevitable conclusion has to be that the neutral rate of interest, the rate at which the Fed keeps rates over a cycle, must be higher than historically has been the case. Because we've stood up to a bunch of shocks with no noticeable impact on the economy. The third is federal budget deficits remain high and credit quality is becoming into question. I think it's a pretty well-understood topic. And then finally, a new topic is there's a lot of AR-related long-term corporate borrowing going on.

8:54Nick Colas:And that's pulling demand away from treasuries because all of a sudden where companies were kind of flat issuing long-term debt, now you have a lot of new players in the market issuing a lot of long-term debt that is competing directly with the treasury bonds. So the combination of those factors is why we're seeing real rates keep climbing. And the conclusion that I've been talking about with my clients is you've got to keep on portfolio durations pretty short, like under five years, until the U.S. economy weakens. Because that will begin to take away this topic of mutual rates have to be higher and that should stabilize real rates at the long end of the curve.

9:32So, okay. So financial advisors building portfolios with fixed income, the answer to those people would be you can ladder, but you don't want to be laddered out to 30 years. It's more a stepstool than a ladder. It's a stepstool. The time to get longer on duration is when the economic data is weakening and the risk of one of these shocks turning into an event. That's where you might want that longer term duration as your portfolio hedge. But we don't have any signs of that right now. It's not that it can't start. There's no reason to think that it is starting.

10:11Nick Colas:No. And we actually have a counter example of all these shocks since 2020 and no recession, which in many ways is just astounding. It explains a lot of things in capital markets, not just what's going on in bonds, but it really shows up in bonds in a very pronounced fashion. Right. So to sum up, the resilience of the economy means the neutral rate should be higher. So that's one reason for it climbing. And then you've got, then you've put the slide right back up. And then you've got the federal budget deficits. I think already year to date, the deficit is already larger than it was for all of 2025.

10:49So that's heading in the wrong direction. And that pulls people out of feeling very safe in US bonds. They still feel safe, but maybe a little less safe. The artificially depressed part is obvious. I want to double click though on this fourth point. AI related long-term corporate borrowing pulling demand away. Chart off guys. So I think the number is$1.75 trillion in corporate bond issuance this year. And I think we did a show about this last week. I think that's running 20 % or 30 % ahead of where we were at this time in 2025. And we all have seen the headlines. We've seen Oracle and Meta and Amazon and Alphabet.

11:39They're all out in the market raising money. Sometimes they're doing secondary stock offerings, but oftentimes they're doing bond offerings as well. They should, with the exception of Oracle. These are very high grade credits. They're able to borrow at very low dollar amounts. It's less dilutive than doing this through equity. And the bottom line is the investing public is hungry for these deals. The competition with treasuries part, I think, is the leap that a lot of people don't make very easily. So could you explain why Alphabet selling bonds would impact the price of a long-term treasury? Sure.

12:20Nick Colas:As a bond investor, you got to think about risk, right? Now, treasuries have been notionally the risk-free rate and still are from an academic standpoint. And certainly, they're money good as far as getting repaid. But I would put it this way. If I told you I was going going to sell you either a Google 10-year bond or a U.S. 10-year treasury, which do you think will trade better or which do you think is more notionally secure? Because on the one hand, you have, yes, the U.S. government ability to tax. Great. On the other hand, you have Google's cash flows, which are profound. And in some ways, Google, I think I could argue, is at least as safe as the U.S.

12:57Nick Colas:government because it's a global business and very well managed. So as a bond investor, you're thinking, okay, what is risk? We've just seen TLT compounded negative 4 % over the last six years. That's real risk. So I think bond investors look at this more holistically than perhaps an equity investor thinks they probably should, but they're just looking for the right amount of yield with relatively little risk. Remember, bond investors are risk averse. The best they can do is get what they're promised back again, coupons and principal. They're just looking to get their coupons and get their principal back.

13:30Nick Colas:That's all they want. And Google is just as likely to do that as the US government. Right. They're not making a bet that Google is going to outperform the NASDAQ or that Google stock will be higher. The bet is Google will give me back my principal and they're going to pay the interest rate. And there won't be insane volatility along the way toward that happening. the yield is going to be higher than what a comparable maturity treasury might yield and that's because google is not sovereign doesn't have the marines and the coast guard and a navy but it's got other attributes that maybe in times like these are as or even more attractive than the safety that you feel buying a 10-year treasury exactly and we'll get to this in the last section but i i've been making the argument to clients that the reason the u.s dollar is a reserve currency is because of the innovation in the u.s the long-term innovation in the u.s that is what makes a reserve currency not just the army and the navy and the taxation but what a society does with its capital and google is an exemplar of doing something clever with your capital.

14:41Right. Okay. So competition from Alphabet and Amazon and these other giants selling bonds in the market. So every dollar that goes into a high-grade corporate bond is a dollar that does not go into a US treasury, which is less demand on the buy side, which means higher yields. Is that what we're saying?

15:03Nick Colas:Yes. Essentially, yes. Yeah, exactly. Exactly. It's a trade-off every PM has to make. Do I buy treasuries? Now, if you're a pure treasury buyer, yes, of course, you're just buying treasuries. But most fixed income, most RIAs are looking at the whole spectrum of fixed income and saying, where's my best bet? Okay. So now the question, so where the equity market investor then goes to is, well, what does this mean for my stocks? Or what does this mean for the market or the potential for new investment coming into stocks versus bonds? At what point do higher yielding treasuries represent new competition for, for example, dollars coming out of a money market fund?

15:48Yeah.

15:49Nick Colas:I mean, the way I think about it is more around the concept of at what level do rates begin to threaten the economy? Because as an equity investor, you're worried about earnings. You're worried about the volatility of earnings, the strength of earnings. And so the question is, at what level do we get rates? And it was for most of this decade, it's been 5 % on 10s. If you get to 5 % on 10s, there's the threat the economy slows down because borrowing costs are higher, economic growth slows, and earnings become touchy. We're not there yet on 10s. We're at 470, 472 today. And so we're not quite there.

16:23Nick Colas:But I think this is, if you want sort of a trigger point, look at 10s, look at 5%. If you get there on tens, then at least over the 2020s, the equity market's begun to really jitter. And that's the level I'm looking for. One of the things we're saying on TV, which everybody seems to like and clap at, is as long as the pace of – like as long as the – it's like – in other words, not about the absolute level of the rate. It's the volatility of how quickly the rates get to that level that's more potentially damaging. And so I think you would agree, for the most part, this summer, rates have been rising.

17:05Now they're rising in the belly of the curve, not just the long end, but it's been orderly. So people on TV keep saying, yes, but it's orderly. Yes, the rates are higher, but the path to higher hasn't been shocking or the velocity of the rates rising has been in check. Like these are the things that you're hearing people say and everybody likes hearing those things because it's reassuring. What do you think about that concept that it's not just the absolute level of rates, but what does the path look like for us to get there?

17:40Nick Colas:It's a fair point. And it's fair because if you move slowly, then you have time as an equity investor to judge how those changes in rates are affecting earnings at your companies. If it happens quickly, you don't have that opportunity. It's just a big shock and rates go to five. And what do I do? And what's going to happen to my companies? When things go slowly, the market has time to judge and assess and look at what's going to get hurt, look at what's not going to get hurt. But yeah, the rate of change does matter. And so far, yes, it has been orderly. That being said, it was not disorderly when the 10s got to 5 and 23, I think it was.

18:16Nick Colas:And the market still kind of twitched at that point. So I think it is a matter of speed. But I also think that there is a level where equities say, I'm not so comfortable paying 20x for the S &P 500. One of the get out of jail free cards from 2022. So in 21, they start the rate hiking campaign. And it's way more aggressive than anything our generation has experienced. You had to have been around in the 70s and 80s to have seen anything like it. So that's a really long time without as aggressive a rate hike cycle as what we experienced in 21 and 22. But one of the get out of jail free cards for the stock market was that it just so happened the largest companies in the indices that had the least amount of interest rate risk because they weren't big borrowers were the companies that we were relying on the earnings coming from.

19:13And so what they did was they looked at their share prices down 30, 40, 50 percent, and they committed to getting some religion on spending. Meta is like the poster child for this. They got over their skis in the bubble in 2020 and 2021, funding a lot of projects with no ROI. They cut all that out. The stock prices recovered. But we were never really in danger from 5 % interest rates or from the velocity of that rate rise because the largest companies weren't big bond issuers, didn't have that role risk. In fact, it was the opposite. They refinanced so much of their debt at 0 % in 2020 and 2021 that we weren't even thinking about the indebtedness of the Fortune 500 companies.

20:03I think what's changed is we can't say that anymore. These companies have become – they've gone from being buyback companies to being companies that sell stock on the secondary market and issue debt. and some of them do have role risk. And I don't think it's an accident that Oracle is the worst performing mega cap stock and is also the lone mega cap stock with a debt rating that's almost been cut to junk. So talk a little bit about the difference between now and 2022 and maybe why we shouldn't be so sanguine about it.

20:40Nick Colas:Well, okay. So in 22, tech was the hardest hit and it only bottomed in December. Stock prices. Stock prices. So granted, they had had a huge run in 2021. There was a pullback coming. But I think 2022 was, I want to say, the ninth or 10th worst year for the S &P since 1928. It was up there, down 19 % on the year. It was bad. So there were a lot of unwinds going on. And your fundamental point, I think, is absolutely right. The nature of these companies has changed profoundly for two reasons. The first is financial leverage, which you're right. It's much different now. And associated with that, you don't have money going back to shareholders.

21:20Nick Colas:You have money going into AI. And that's the second reason they're different. You now no longer have the idea that these are steady 30 % ROI, ROE businesses that can reinvest what they need to reinvest and give a lot of cash back to shareholders. You now have a lot of reinvestment risk on top of role risk, as you call it, from the bond market. So you have these two simultaneous factors. The offset is the technology that they're investing in is, both in practice and in theory, pretty compelling and pretty potentially world-changing. So the market's so far been willing to give the benefit of the doubt.

21:58Nick Colas:I worry a lot more about the AI side because ultimately it's going to have to fund those debt issues, fund the debt and fund the cash flows, fund the coupons, fund the principal repayment. But you're right. It kind of, you put a bow on it and it's a much different package from what we had just three years ago. Yeah. Is that why the 5 % trigger could really come into play here? It sort of did in 22 and we did have a market-wide pullback. And you're right. Like the tech stock sell off was much more acute than the S &P. Then we had this this hiccup in 23 with some of the banks in the spring. We had a couple of banks go under or be resolved is how the regulators put it.

22:46But like this time around, now we have heavily indebted projects all built around a single theme. We've got this interplay of private credit and private equity companies funding some of these projects with other people's money, a lot of illiquidity, and then a lot of these liabilities or guarantees coming directly from the hyperscalers. like these are all things that didn't exist in 2022 or at least not to the extent that they do today is that why that five percent interest rate trigger on the 10-year bears even more importance potentially than than it did then i think there's a lot of the same honestly and

23:28Nick Colas:the fundamental thing is that ultimately the current cash flows of the hyperscalers are still economically sensitive. It's advertising. It's high-end electronics. It's all the things that get pulled back in a recession. And we haven't found it yet, but there must be a breaking point for the U.S. economy on the yield curve somewhere. You know, we got to five and didn't have a recession. We got four 75 basis point rate hikes in 22, didn't get a recession. We've had two oil spikes and didn't get a recession. So there's an amazing durability in the U.S. economy. But there has to be a point on the tens, maybe it's five, maybe it's six, where car sales go down a ton, home sales go down a ton, people stop spending, you start to get layoffs.

24:11Nick Colas:We haven't seen where it is, but five has been a level where the market begins to get worried about it. And again, the cash flows, underlying cash flows from big tech are still cyclical. They're still cyclical businesses. Right. Okay. So we're going to watch that level. The last thing I would say about it, my colleague Ben Carlson has written a lot about how the average rate for the 10-year in the 1990s was 5%. And that was, A, a decade with no real recession. You had like early 90s, you had the SNL crisis. But like once that was over, we were pretty okay. The economy grew. stock market was one of the best stock market decades ever so the level itself provided like we we can get um accustomed to it i guess is not the threatening thing per se um it's it's about what else is going on in the context of that level or or or maybe not in your opinion what do you think it is a fair point in terms of static yes the average was five however it was coming down from 15 in the 80s right it was coming down from the paul volker's squeeze the economy of good inflation down so i think i want to say tends to peak at 17 and then by the 1990s there were five and there was a massive rejuvenation of economic growth because the cost of money had come down so quickly that's a big tailwind that we do not have and now we have sort of the opposite we had a world where you made 8 % on 30-year treasuries for a decade per year, and now you're not.

25:53Nick Colas:And now you used to have 1 % rates, and now you've got 5 going to 6. And so where you're coming from is oftentimes just as important as where you are when it comes to capital markets. We're coming from an era of declining rates for the better part of 40 years and now on the up again.

26:14That's a great addendum to that idea. Yes, we've had decades at 5 % where the stock market did well, the consumer did well, the economy did well. However, that's a tailwind from the rates having come down from 15 to 5. This is not that. This is coming from 0 to 5, and where does it stop? We don't know yet.