The 5% Yield Warning: What Bond Markets Are Telling Us

Big nonprofit hospital systems are making billions on 340B medicine markups. Hospitals can spend on luxury perks while engaging in aggressive debt collection practices. They get rich while patients like you pay more. Tell Congress it's time to hold hospitals accountable. Washington should fix 340B. Visit phrma.org/340bmarkup to learn more. Paid for by pharma. Ready to soundtrack your summer? With Red Bull Summer All Day Play, you choose a playlist that fits your summer vibe the best. Are you a festival fanatic? A deep-end DJ? A road dog? Or a trail mixer? Just add a song to your chosen playlist and put your summer on track. Red Bull Summer All Day Play. Red Bull gives you wings. Visit redbull.com/brightsummerahead to learn more. See you this summer.

Hello and welcome back to the Market Maker podcast. And rather than talk about the ongoing wild swings in the global crude oil market on whether or not we're going to get peace or Trump's going to change his mind or whatever the moving part is that's happening at the moment, I thought what would be a better episode, or at least might add more value because we've discussed the ongoing oil move quite a lot is something that affects everything in our daily lives, and it happens in the basement of the Treasury. And that is then what's happening with yields and debt levels. And so the 30-year US yield hit 5%. That was on the beginning of the week, and that's the first time in many months. And in the UK, it's even uglier. The 30-year yield is hovering, it's getting close to 6%, which is the highest since 1998. And that of course comes as we are recording this on the coattails of the surge in the Reform Party at the expense of Labour and quite a few question marks then on the future leadership and therefore policy consequences that that could have on the current Labour Party, and that is definitely tied to yields in the UK and explains some of the rationale there. So we'll have a look at that. But there are words when we start talking fixed income of things like the risk-free rate, the discount rate, the 5-year breakeven inflation rate. There's lots of jargon, let's call it. And so no better person to have on the pod than Piers Curran, our teacher of physics, maths, history, chemistry. Now we're going to go into economics, Piers. How's your economics?

Well, I never actually studied economics formally. So let's find out.

Strong start.

Let the listeners judge. Yeah, let's see. But I think that you're right, you know, 'cause what dominates, like if you are, if you are just reading the general financial press, then obviously it's geopolitics, oil up, oil down, and then it's stocks. And depending on which nation and country you're looking at, but if we just choose the US as an example, Well, their stocks are through the roof. It's quite amazing. So you've really got this disconnect actually between how different asset classes are behaving here in response to the macro sort of scene. And so stocks are through the roof and yet bond markets are showing signs that there's sort of monsters lurking in the shadows. And so you've got these yields creeping higher on what we call the long end of the curve. So I thought it'd be good to explain what this might mean. What does it mean and what might it mean if these moves continue? Because at the moment, and again, depends, right? If you're looking at the UK, well, it's a bit more desperate. You know, you've just, given us a stat. The 30-year yield is the highest it's been this century, right? You've got to go back to 1998 to find the last time it was at 5.7% and kind of sneaking up towards that 6% thing. That's a lot, right?

Look at you dropping the century word in like you're head of the Telegraph newspaper.

Yeah, but I think we can now actually use that term properly. There's no point in like 2011 saying, oh, it's the highest this century because it's 11 years, but we are more than a quarter of the way through the century. I think actually now the line's been crossed. You can start throwing that stat and it actually means something. Now with the— that's the UK. It's not like that everywhere. And actually with the US, yes, yields are creeping higher and this 5% handle, this 5% kind of ceiling is really, really, really, really critical for the 30-year US government bond yield. However, it was trading at these levels back in September, so it's, we're not at, you know, century highs here in the US. And actually this 30-year kind of handle is a really key resistance. Last time we, we kind of hit it in, in this kind of phase, you would say, we hit it first back at, in October 2023, right? Which was when this yield kind of first got reached. And then it's been a really key resistance ever since. So we, so October 2023, then we drifted back lower. Then like January 2025 drifted back lower. We tested it again in May of 2025, then it drifted back lower and we're kind of back, right? Over the last month, Well, let's say 6 weeks, we're back at the 5% handle, but it hasn't been breached yet. We did briefly on Monday. The reason why it's in the press Monday, for like half a minute, it kind of ticked above 5% and it's kind of just lurking right now. It's at 4.959, right? So we're, we're there again. And so you've got this kind of general slow uptrend over the last few years hitting this horizontal resistance line. And normally, just from a technical point of view, it's normally that upward trend that would kind of win out. And so right now, from a trend point of view, we're expecting things to go through and over 5%.

Can I just ask, why are you talking specifically about 30-year?

Well, so because this yield plays a huge and often unknown but a monstrous important impact on our, as you said, day-to-day lives. So how? So actually something that wasn't on our list, but I've kind of just thought about, it's kind of, if you think about the, you know, the average family, if you are lucky enough and able enough to buy a house, then you are going to, you know, it's the, obviously it's the biggest purchase of your life, you know, and you're going to need to borrow to make that happen. And so you get a mortgage. So the cost of your mortgage on a monthly basis is actually linked to stuff like the 30-year bond yield. Okay. So mortgage rates are very heavily linked. So that really directly impacts a family's cash flow, right? Well, you know, how much money can they, what's their surplus income that they can go out and spend on the high street and stuff is very much geared towards, well, how much interest am I paying each month on my mortgage now? That said, with mortgages, there are different types of loans. There are fixed-rate mortgages and then there are variable-rate mortgages, right? In the UK, we love a fixed rate. And so generally in the UK, we're on these fixed-rate terms, but these fixed rates last for 2 years, 3 years, 5 years. It depends which one you go for, right? But the point is, if bond yields stay high enough for long enough, then people are going to have to rotate off the fixed rate and go and renew their mortgage. And this is when the the cost of it really starts to step higher and has a massive impact on a family's ability to spend, right? So there's mortgage rates. There's also this, if you think about, I'll go now and think, go forget the average family on the street. If you now go to an investor and how does an investor actually start to value stocks? So if you're trying to decide, am I going to buy a stock? Is it expensive? Should I sell it? Or sorry, am I going to buy a stock if it's cheap or am I going to sell it if it's expensive from my own personal kind of valuation perspective? Well, then actually the things like the 30-year yield play a really significant role in that as well. So perhaps people don't understand bond yields play a monstrous size role in how you end up valuing a business. And this is because of what something we call the risk-free rate. And then this feeds into the kind of discount rate from a valuation perspective. So if you are trading and you are taking risk by buying a stock, which generally might be considered as a risky asset, you've kind of gotta think to yourself, well, all right, what, how much money could I make without taking any risk? And so here you think, what's the safest sort of asset on the planet? And at the moment you might put the US government bond in that bucket. Well, if I just bought US government bonds where I've basically guaranteed my money back, what's the interest rate I'm going to get? And so right now, 5%. As of Monday, the 30-year US government bond yield trades at 5%. So basically I can yield 5% on my money without taking any risk in inverted commas. Okay. So when you're thinking about buying risky stuff, that, well, that's the That's the baseline. You need to be earning over the risk-free rate, otherwise why would I take risk? And so from a buying a stock point of view, it's like, how much above the risk-free rate am I expecting to earn here? Okay. So obviously when yields rise, that risk-free rate is rising, meaning it's just a higher barrier to kind of take risk on a stock. Now separately, how do I value a stock? Well, here I'm thinking about a company's future cash flow. Basically, I'm buying a share in a company today because I want to benefit from its earnings in the future. Okay? So when we're going through a valuation process, what we do is we take, let's say if we're expecting a company to make, let's make this super simple. Let's say we're expecting them to make $10 of cash per year, right? Forever for the lifetime of the business. Well, what you've gotta consider is the fact that $10 in the future is not worth $10 to me today. And that's because inflation, inflation erodes the value of money over time. So if I'm thinking about a company generating $10 of cash in 5 years' time, Well, how do I value that today? Should I, how do I value that $10 today? And what I do is I discount it. Okay, so what's the discount rate? And that will be based on this kind of risk-free rate plus a premium. So you'll take the 30-year government bond yield, let's just say it's 5%, and you'll add a premium on top of that. You might say 4%. So you might say 5% plus 4%, 9% is my discount rate. So I'm going to take the $10 in 5 years and I'm going to discount it back 9% per year to figure out how much that's worth me today. Okay. And then that kind of is the basis of my valuation of the company now. So the point is, if the risk-free rate goes up, if the 30-year bond yield goes up, well then actually the discount rate increases, reducing the value of the business. And to kind of give you some super rough back-of-the-envelope math, let's just say, because look, the 30-year bond yield, the US 30-year bond yield was at 4.6%. That was the low of the year, and that was back in February. If let's say we break 5% here, really important resistance level, you are going to get an accelerated breakout. You could quite quickly get up to 5.4, 5.5, let's just say 5.6, right? So let's just say it went 1% higher from 4.6 in February to 5.6, I don't know, let's just say in June. That's a 1% move on the 30-year bond yield. But when you feed that into your valuation kind of process, that could lead to actually like a 10% discount in the valuation of a company. So a 1% move on the 30-year could lead to a 10% drop in your valuation. So this feeds through then into other asset classes and what people are prepared to buy shares at. Now, I'm going to contradict myself massively later on in this episode because if I've just said all of that, well, surely stocks should be going down then because if the valuations of these businesses are dropping, surely the share prices are dropping. Uh-uh.

Yes.

S&P all-time high.

I'll take your 5% and I'll lift you 10% in 4 weeks.

Yeah. Right. So there's other forces at play, right? When it comes to stocks and valuing companies, and we're going to come on to earnings, actually, how are the companies performing and how quickly are they growing is obviously a really important part as well. We'll come back to that, but it's just to say that this bond yield It impacts mortgage rates, which impacts families' ability to spend money. It impacts valuations on stocks, which yes, is important for investors, but don't forget, you've got people working, have pensions that are invested in stocks, right? And so people's net worth is very much linked to kind of stock valuations. And then there's this other thing called inflation. And actually there's this other thing called central banks and ooh, are they going to raise rates because inflation's rising? We've talked about this to death. You know, obviously the energy price moves to the upside, even though oil's back, Brent's back to $100, you know, that's still whatever. I can't remember the numbers now, 30% up on where it was before the Gulf War situation, right? So this is feeding through into inflation and a key, a really important measure of that I always love to look at is gasoline prices in the US of A. What's the gas price at the pump? And if you go back to before the Gulf War conflict, it was a smidge below $3. So actually $2.98 a gallon. Okay. It's now $4.56 and on the rise. All right. So anything above $4 is kind of political suicide, basically. We're now at $4.50. So this is inflation.

So quick question then on inflation. So we just, we're talking about oil there. There's the Middle East, there's a supply shock. So what can central bankers do, or market participants monitor in order to kind of factor those influences in to then try to calculate inflation and therefore subsequent impacts on rate expectations?

You've teed me up nicely there because this, the theme of this episode is bond yields. And there's something called, and a real favorite for central banks, something called the 5-year breakeven inflation rate. Which sounds super fancy, but basically it's looking at bond markets. So this isn't— so right now the 5-year breakeven inflation rate in the USA is 2.72%. That's the highest it's been since August 2022. In layman's terms, that's basically saying, what's our best guess at what the inflation rate's going to be over the next 5 years? 5 years, right? So this is medium-term inflation and that's 2.72%. Don't forget the Fed's target is 2%. So it's way above, you know, target. So this is where you start to think about, well, are they going to need to start raising interest rates? So there's that short-term inflation thing, which might be an energy price, energy supply problem. They're not so worried about that transitory. It's the medium-term stuff where they're like, oh, hang on, maybe we do need to act. By the way, go and check out what the Norwegian Central Bank did yesterday. Hiked rates against expect— I think, can't remember the numbers now. Out of Bloomberg analysts, you had about 20 analysts and only 3 or 4 of them expected a hike. So it was like definitely not expected. Norway have hiked. The Aussies, They're 3 hikes into a cycle already this year, right? So it's happening and now you're getting the 5-year breakeven move higher in the US. So you got Kevin Walsh who's going to step into his Fed governor seat. He's going to have a real problem. This is an uncomfortable scenario for him to kick off his kind of career as Fed chair, given that obviously Trump wants rate cuts.

Question from a trading perspective. What does it mean then? Like, how do you as a former trader think when there's parts of the world, developed economies who are hiking and those who are not? As then a division then of action that's being taken because calls are having to be made here on the direction of travel for inflation. Some are acting, some are not. So what does that actually translate to from a opportunity perspective?

Well, so you've got interest rate differential, and so this is one of the best kind of sort of trading scenarios where you are getting different opinions and different actions. For most of the time, central banks are kind of moving in the same direction. Okay? They're all in hiking cycles, they're all in cutting cycles, they're all interest rates are unchanged, right? Normally they're in lockstep. Because the global economy's so kind of connected and integrated, right? It's when you get people going outta sync that you start to get big moves in things like exchange rates, by the way. So the currencies, you know, the Aussie dollar versus the whatever, the US dollar is going to really start to shift and the Aussie dollar's going to appreciate if the Aussie Central Bank's hiking and the US Central Bank's not. And so you start to get these divergences in interest rate expectations, which really then shifts through to particularly FX and exchange rates. So yeah, there's lots of opportunity here. But look, back to this 5-year breakeven inflation rate. So it's a really key one that the Fed look at and it's moving up. Now, what is that actually? So where does it come from? It's not an opinion, it's not a poll. You're not asking people their opinion on where inflation's going to be. This is straight from the bond markets. So basically you take a 5-year government bond yield and then you take what's called— you can buy inflation-protected bond yields, which basically means you get a yield plus what you think the inflation rate's going to be. 'Cause remember, inflation erodes the value of money over time. So the 5-year breakeven inflation rate, if you want to just simplify it, is actually What's the yield on an inflation-protected 5-year government bond versus what's the yield on a normal 5-year government bond? And the difference is basically the medium-term inflation expectation according to bond markets. So that's where that 2.72% comes from and it's rising. So again, bond yields have a huge powerful influence on what the Fed might do. And obviously then that feeds through to everything, the cost of borrowing, actually across the planet because a lot of countries, and particularly emerging market countries, have dollar-denominated debt. And so if the dollar's appreciating because of Fed rate hikes, this is a killer for emerging market, you know, dollar-denominated debt, for example. So yeah, bond yields, ultimately they have the keys to the safe. Stock market's fine. We'll talk about that in a sec. They're kind of moving off different vibes sometimes. But in the end, you know, where do economies move? In the end, that's determined by the bond market.

If the 30-year breaks through, triggers a bit of a run north aggressively of 5, the breakeven goes with it.

Mm-hmm.

Does Trump cut a deal? Wow.

So this is it. Are we back to Taco Trump? Trump always chickens out. I mean, yeah. I mean, his previous behavior would suggest yes, but as we mentioned on the episode last week, it's almost like relatively the US are being less harmed by this situation than the rest of the world. So I don't know, in Trump world, maybe that's a Maybe that's a positive thing.

What's interesting is looking at that 5-year though, breakeven chart. Yes, direction is moving up, but it's fairly calm and orderly.

Yeah.

Right. Well, if you were thinking about all of the other narratives you are fed, correct. The bond market looks surprisingly calm.

Yep, it does. But that's why that 5% ceiling that resistance level that hasn't been broken, even though it's been test— we've been testing it for basically 2.5 years and it hasn't been broken. It's just that if it breaks now, and there's a lot of fundamental macro factors that are providing upside forces, so maybe it's better to say this more likely is going to break now than at any other point during this 2.5-year period where this level's been tested.

Question then, when all the hedge funds got smashed in, I think March, I mean, I've just saw an FT article yesterday, then they all came ramping back in April and they've had the best April in years after having the worst March. But that was because we saw this very quick switch in interest rate short and interest rate expectations. So how did that work there? Why did they get so badly burned in the— in that period when the 30-year itself is fairly calm. So how do the different ends of that spectrum on the yield curve operate? It was the speed.

I think it was the speed of movement and the very quick, very, very— it's almost like a V-shaped change in interest rate expectations. An incredibly rapid move from expecting 2 cuts in 2026 to now expecting hikes. Like just in a, in the space of a week, right? So that rapid change and then accelerated moves on the short end, 'cause it's the short end yields that are more influenced by interest rate expectations. And then you trigger stop losses and you start to get liquidity issues and you start to get rapid-fire moves in markets. And then whilst the long end's anchored, 'cause that's just a lot more stable and thinking more about inflation, but Yeah, that's why. But then the other reason why hedge funds have done better since is because of, of course, stocks. US stocks have just, it never ceases to amaze the buy the dip.

Cut for stats. Last 30 days. Have a guess. Percentage. How much is Google up in the last 30 days?

Ooh, Google's had a stormer. Phenomenal earnings. 25%?

Up 25%.

Oh, well, on the nail.

On the nail.

Okay.

Bosch.

All right.

Is current.

One for one.

Amazon.

Uh, ooh, less up, but less, I don't know, 15%.

23%.

Oh.

NVIDIA 16, Microsoft 13, like Apple, the dinosaur, up 11.

Yeah.

Yeah. These hedge funds have absolutely killed it in this last 4 weeks being the leaders of that tech trade.

Yeah. And look, that's because earnings, earnings have been phenomenal. So that, that's the, this is your disconnect here. Whilst you've got the macro factors, Gulf War, all these inflation concerns, what's the price of petrol at the pump, you know, all that kind of stuff. In the meantime, in Q1 of 2026, US big, big large-cap companies absolutely smashed it. Now that is Q1, right? I mean, this Gulf situation didn't kick off until March, so most of Q1 we weren't impacted by that. So What happens in Q2? Fine. But actually the guidance going forward's been pretty strong and that's 'cause you've got this AI revolution, this secular shift to AI going on, which is really making it so difficult when you look at the bond markets and the stock markets. Those two markets are not talking the same language.

So earlier you were talking about the risk-free rate and thinking about, well then I've gotta earn more than the 5%. So what type of growth rates have we seen with some of these S&P 500 earnings that have come out?

Yeah. Well, yeah, you're talking, I think that it was, what are we on? 27.1%, I think it is, which is the average earnings growth rate for the whole of the S&P 500. We're most of the way through the earnings season now, so it's 21.7%. That's up from 15%. Last time out. That's a ridiculous quarter. In fact, it's the best, it's the fastest growth rate on earnings in any quarter since quarter 1, sorry, quarter 4, 2021 when we were ramping out of COVID So it is extraordinary. And so what, that's the micro picture, especially in the US, which is helping the S&P and the like just absolutely smash all-time highs. Yeah. So that, that, this is the big disconnect. And look, in the end, who's going to win the fight? In the end is bond markets. They will always win. It's just short term right now. Stocks are loving life. But if yields can, if that 30-year breaks 5%, it stays above 5% and continues to trend higher for a month or two. I think we're into a different world.

Quick word to finish then. The UK's yields are higher than the US that we've been talking about. There's also a degree of uncertainty around the leadership of the current Labour-led government. Keir Starmer said after the election results that have come out, they're still coming out this morning because we're recording this on Friday the 8th of May. He said he's not going to walk away. His own words, he doesn't want to plunge the country into chaos. Yeah, he did say in the coming days he'll set out further steps that Labour will take to convince the electorate. So yeah, what, why, just to connect the dots for people, why does that political uncertainty already start impacting that UK yield price? And how does that, how do you connect the potential threat and change of leadership to translate into how bond traders would look at the yield?

Yeah. Well, firstly, I heard Starmer being interviewed this morning following these kind of local elections. It's just so funny. So funny. He got asked 4 different questions basically, and he used exactly the same answer for all 4 questions that were entirely different. So he's obviously got a single line narrative and it is about not tipping the country into chaos. So what does he mean? Because basically if he gets chopped off, if there's a leadership challenge, and look, he's had a shocker, right? I mean, there should be a leadership challenge basically. But if there is, who's in the wings waiting? And there's one guy called Andy Burnham, basically who's in the wings. It's going to be someone who's further left. Politically than Starmer. So there's a guy called Andy Burnham who's currently the mayor of Manchester who's made it very clear his intentions of wanting to become party leader. So if there's a leadership challenge, if Starmer gets kicked out, you're going to get a new guy coming in who's more left, which is going to mean they're going to come in and they're going to borrow more money. They're going to scrap all their fiscal kind of rules and they're just going to borrow more money. Borrowing more means we've got more debt, and ultimately this would feed through to bond markets going, hang on a second, this isn't sustainable. And we'll start to go into the realm of, hang on, can the UK afford all this debt? And bond traders will assign a higher risk to owning UK debt than before. And if there's a higher perceived risk, they require a higher yield in order to take that risk. And this is where yields continue to climb and that negative feedback loop into everything we've just said kicks off, right? Mortgage rates go up, 5-year breakeven inflation rates go up, everything goes up. Or, you know, and then this is the problem. So he is right. If he gets removed as leader, it could trigger chaos. So we're kind of stuck with a really bad leader or potential bond market chaos. So yeah, talk about two incredibly bad options.

I just, I don't get it sometimes with these politicians because he is right, as you just said, it would create at least short-term a lot of chaos. It's just how they articulate it. Like, yeah, if I was a normal person on the street, which I am, I'd, and what if I didn't, I didn't work in finance. I'd be like, oh, he just means that it's going to be without leadership and then we'll just pick someone else.

Yeah.

You've got to do a better job articulating this. You can't just say it's going to throw into chaos because that connection is not made. You've got to say exactly as you just explained it, that this is going to impact your life in these ways because this is going to happen. Or at least, I don't know. I just find it so misplaced where politicians are not reading the pulse of the feeling out there to, and that's why populism is so, has such gravitational pull, I think, because their messaging is, I always find is much better. And I'm not saying this with any political leaning. I just wish that some of these more centrist-leaning governments would just call it as it is and not tread around the issue because That's almost the center of their demise.

Well, you know, exactly. The writing's on the wall when you have to start justifying your position based on the idea that the alternative is worse rather than framing it as in stick with me because it will be much better. You know? Yeah. It's all a bit of a mess.

All right, well, we'll leave it there. And thank you very much, Piers, for all of your knowledge as usual. Any questions at all, do let us know, and we'll have a new M&A episode that will drop at the beginning of next week as per usual, and another global macro one to follow at the end of every week. So make sure that you like and subscribe to the channel, however you listen to this podcast. Thanks very much, everyone. Take care.

Thanks a lot.

There's a new way to Sweetgreen. Meet Wraps. Handheld, hearty, and made for life on the move. With bold, chef-crafted flavors, fresh ingredients, and over 40 grams of protein, they're built to satisfy without slowing you down. Try Wraps today in the app or at order.sweetgreen.com. Available at all participating locations.