Higher interest rates might be a good sign
I have been thinking about the current debate over Treasury yields and the growing concern that higher interest rates are evidence of an economy being overwhelmed by debt. I think there is a more useful way to look at the issue.
Higher interest rates are not necessarily a sign of economic weakness. In many circumstances, they are exactly what we would expect from a healthy, resilient economy experiencing solid nominal growth and persistent inflation.
That distinction matters.
Public Debt vs. Private Sector Balance Sheets
The conventional narrative focuses heavily on the size of the U.S. government's debt and the amount of Treasury securities being issued. The argument is straightforward: the government is borrowing enormous amounts of money, the supply of bonds is increasing, and investors therefore demand increasingly higher yields to absorb that supply.
Bianco Research offers a different interpretation. The argument is not that government debt is irrelevant, but that it is being given too much explanatory weight.
When we look at the entire economy rather than the federal government in isolation, the picture is more complicated. Government debt has increased substantially, but households and businesses have reduced their leverage relative to the economy. In other words, debt has shifted from the private sector toward the public sector rather than simply exploding across the entire economy.
The same principle applies to interest expense. Government interest payments have risen sharply, but corporations have benefited from having locked in historically low borrowing costs for much of the past decade. When the interest burden is viewed across the broader economy, it is not nearly as extreme as the federal government's interest expense alone might suggest.
Why Are Treasury Yields Elevated?
This leads to the more important question: Why are Treasury yields high?
The answer may have less to do with an inability to finance the government's debt and more to do with the underlying economy.
A strong nominal economy produces stronger demand for capital. Persistent inflation reduces the real value of future fixed payments. Investors therefore demand a higher nominal return to lend money for ten or thirty years.
In that context, a 5% Treasury yield should not automatically be interpreted as a crisis signal. It can simply be the price of money in an economy that is growing at a healthy nominal rate.
Rates as an Economic Indicator, Not a Diagnosis
This is an important conceptual shift.
We often treat falling interest rates as inherently good and rising interest rates as inherently bad. But that relationship is not that simple. Rates can be low because an economy is weak, demand is poor, inflation is absent, and policymakers are attempting to stimulate economic activity. Conversely, rates can be higher because economic activity is strong, capital is in demand, and inflation is running above the levels investors experienced during the disinflationary decades.
In other words, the level of interest rates tells us less than the reason behind that level.
The Hidden Risks of Financial Repression
This distinction also explains Bianco's warning about financial repression—the attempt by policymakers to artificially suppress interest rates to make government debt easier to finance.
If inflation remains persistent while policymakers attempt to force long-term yields lower, bond investors may eventually conclude that they are being asked to accept inadequate real returns. Rather than solving the problem, artificially suppressing rates could undermine confidence in the bond market and cause investors to demand even higher yields.
The Central Banking and Bond Market Paradox
This produces an important paradox: trying too aggressively to push interest rates down can ultimately cause long-term interest rates to rise.
The bond market ultimately has to believe that inflation will be controlled. Investors do not simply care about the nominal yield; they care about the purchasing power of the money they will receive.
That is why Bianco's observation that "bond traders can stop panicking when the Fed starts panicking" is so interesting. If the Federal Reserve demonstrates that it is genuinely committed to controlling inflation—even if that means keeping monetary policy restrictive—bond investors may become more confident that inflation will eventually decline. That confidence can help bring long-term yields down naturally.
Capital Must Have a Price in a Functioning Economy
The broader lesson I take from this is that higher interest rates are not necessarily the enemy of economic growth. In a functioning economy, capital should have a price. Savers should receive compensation for deferring consumption, lenders should receive compensation for taking risk, and investors should receive compensation for inflation and the time value of money.
The unusual period was arguably the era in which interest rates remained extraordinarily low for an extended period of time.
If we are moving into an environment characterized by stronger nominal growth, somewhat higher structural inflation, and greater demand for capital, then a higher equilibrium level of interest rates may simply be part of the new economic landscape.
Strategic Implications for Allocators and Advisors
For investors and financial advisors, this distinction is important. Rather than asking simply, "Are interest rates too high?", I think the better question is:
"Why are interest rates this high?"
If the answer is economic weakness and financial instability, high rates are a problem. If the answer is resilient growth, strong nominal economic activity, and moderately higher inflation, higher rates may instead be a sign that the economy is functioning normally.
That does not mean higher rates are always good, nor does it mean inflation is harmless. It means we should be careful about interpreting the interest-rate level without understanding the economic forces producing it.
Ultimately, I think this is the most useful takeaway: interest rates are a price, not a diagnosis. The important question is what the price is telling us about the economy.