Ep 571 | What Every Entrepreneur Should Know About Bond Rates

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every single day brings a new opportunity to get better. Today we're going to spend time getting better at, at finances, at wealth, at the math of our business, and we're going to do so by talking about a topic that may not seem all that exciting, but I assure you every entrepreneur should understand what I'm about to share. What we're going to talk about are bonds and bond rates. What does a boring government bond have to do with your business? Probably a lot more than you think. See, most entrepreneurs, most of our No Days Off Nation, You probably track revenue. You probably track headcount or, or, or per-employee productivity. Maybe you track the stock market if you're investing. You certainly track the real estate market. But almost no— none of our, our nation, or, uh, the No Days Off nation, that is, uh, very few entrepreneurs actually talk about bond yields. And yet those little percentages buried in the financial news, um, they're signaling where the economy is headed. They're signaling how much it's— it's— it'll cost to borrow money. And they're, they're telling you even how your business will be valued in the months ahead. So if you care about your bottom line, if you care about your growth strategy, if you're looking to raise capital or or obtain a loan, then understanding interest rates, especially Treasury yields, to me isn't really optional. And if I'm being candid here with our, with our audience, I'm not an expert in this, in this area and recognized, hey, I need to go learn some more. And so putting today's content together for you, well, it was just as beneficial for me. Because I've had to learn and better understand what I'm about to talk about. So I want you to think of bond yields as the economy's price tag on money over time. So bond yields, bond interest rates, are the economy's price tag on money over time. When the government sells a Treasury bond, it's actually borrowing money from investors. The interest rate, or what's called the yield, is what it pays to borrow. And that yield becomes the foundation for how every other loan, every mortgage, every investment in the US gets priced. So if the 10-year Treasury yield is 4.5%, no one's going to give you a business loan at 4.75%. Why is that? Because there's not enough margin between the 4.5% 10-year Treasury yield and 4.75%. Lenders, banks, investors, they all start their pricing using these benchmark yields like the 10-year Treasury yield. So that's why when yields go up, borrowing costs go up, and when yields fall Well, then capital begins to flow faster because it's easier to borrow. It becomes cheaper to grow. It, it's cheaper to hire. It's cheaper to invest. Now, let's talk around the 10-year Treasury because I think that that 10-year Treasury, at least in my industry, really matters most. You've probably heard the term 10-year Treasury yield. It's been thrown around, especially over the past year or two. It's the single most watched interest rate in the world. Now, why is that? It's because it reflects where investors think the economy and inflation are headed over the next decade. It's used as a benchmark for mortgage rates, for corporate loan pricing, for student loans, even for some business valuations. So the 10-year Treasury spikes, it's a sign of rising inflation expectations or fear that the Federal Reserve will keep rates high. That increase filters down to how your business is financed, what your cash flow needs cover, and whether investors are willing to pay a premium for, for growth. So in other words, the 10-year yield isn't just a finance nerd's stat. It's actually your economic kind of weather forecast, I guess we'll call it. Now, there's a 5-year and there's the 2-year, and then there's this, you know, yield curve. Let's talk around some of that. Where do the shorter bonds like the 5-year or the 2-year come into play? The 5-year is oftentimes used to price things like auto loans. It's used to price, uh, adjustable rate mortgages and some mid-range corporate debt. It reflects medium-term expectations where inflation and rates might land in, say, the next few years versus the 10-year, which has a longer perspective on things. Uh, I am in the process of getting a commercial loan, and the loan is based off the 5-year. They are charging a margin. In this particular case, we're negotiating on it, but Their first offer was 3% plus the current 5-year rate, which is roughly around 4 to 4.25% right now. I'm countering at 2.5%. So bottom line though is the 5-year is being used to drive a commercial loan for me right now. Now the 2-year, the 2-year Treasury, that's like a direct reflection of what investors think the Fed is going to do right now. So if the 2-year is higher than the 10-year, That's actually called the yield curve inversion, and it's usually a signal that recession is coming. Now, why is that? Because when short-term borrowing is actually more expensive than long-term borrowing, it means people expect the Federal Reserve to cut rates soon, usually because the economy is about to slow down. That's why the Fed would turn around and cut rates. So what's good? What's considered good for short versus long-term rates. Let's, let's actually talk about what's healthy or good in this, in this context. So a normal yield curve where longer-term rates are higher than shorter-term ones, that's usually a sign of a stable growing economy. So say you've— I'm going to make up numbers— say your short-term yields at 2% and your long-term yields at 4%, that would be a normal yield curve. You want longer-term rates higher than shorter-term ones. Now, a flat or inverted yield curve oftentimes signals economic uncertainty, maybe even recession. Again, meaning that when it inverts or it's flat, it means the short-term rate is very high relative to the long-term rate, sometimes even higher than the long-term rate. So for entrepreneurs, this really matters because long-term rate drops may signal opportunities to refinance or lock in cheap debt. Short-term rate, rate spikes can actually shut off or choke working capital. Uh, they can impact line of credit costs. They could certainly impact your growth or hiring plans. So I don't think you have to be a, a stock trader or bond trader to care about this. You just need to understand what the signals mean and how they affect your cash and your decisions. Now, who benefits from high and low rates? I think this is where the, the conversation gets a little bit more practical. Low rates benefit borrowers— that's, that's us, right? Businesses, homeowners, students. Low rates benefit governments because it's cheaper to service national debt. And low rates benefit equity investors because lower, lower discount rates mean higher valuations. Now, high rates benefit those that save, so savers, because there's more return on cash and, and CDs and treasuries. High rates benefit insurance companies and pensions because they need interest or yield to meet their obligations. And high rates certainly benefit banks if the yield curve is wide enough, they can earn more on lending spreads. So the rate environment that we're describing here really shapes behavior. When rates are low, people tend to take risks. They invest, they expand, they chase growth. When rates are high, people conserve, they tighten up, they play defense. So if you want to simplify this, you will see the Fed lower rates when they want people to invest, expand, chase growth, and you'll see them raise rates or influence rates when they need people to, to, to conserve a little bit more, tighten up, play more defense. If things get too out of control, That's where they raise rates. If things get too tight, that's when they might lower rates. And there's a, there's a, you know, impact on the 2-year, the 5-year, the 10-year that's driven by those moves. Not directly, but you could see how it influences it. So here's the, here's the big takeaway. Bond yields are not just for Wall Street. They're for you. Stop telling yourself you don't need to know this, this, this stuff. Because if you're running a business, if you're building a family, if you're building your wealth, you do need to understand it. These rates tell you when capital is cheap or capital is expensive, when to lean in or when to protect your cash, when investors are betting on growth and when they're bracing for contraction. You can know more than your competition and your peer if you just learn this a little bit more. You're certainly not going to get it all down in a 10-minute podcast, but hopefully you do a little bit more research as a result. I don't need you checking Treasury yields every day, but you should know generally where the 10-year Treasury sits. You should kind of understand the shape of the curve, and you should use that insight to run your business like a professional. So your action— maybe a question for you: how does the current interest rate environment change the smartest move I can make right now in my business? How does the current interest rate environment change the smartest move I can make right now in my business? Maybe that's refinancing. Should I hold off maybe on expansion? Could negotiating better terms, uh, be a possibility for you because others are playing scared? Either way, the rates are telling you the story. The rates are talking, and the question is, are you listening? Do a little bit deeper dive. I promise you it will be valuable. That's all I have for you today, the No Days Off Podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get after it.