The era of "cheap everything" is ending as the 30-year U.S. Treasury yield breaks above 5% again
- Core Thesis: The 30-year U.S. Treasury yield once again breaking through the 5% mark signals that the market is accepting the long-term normalization of high interest rates. Behind this shift is the simultaneous collapse of the three pillars that supported the U.S.'s low-inflation environment over the past 50 years: cheap capital, cheap labor, and cheap energy. The trajectory of artificial intelligence will now determine the future path of inflation.
- Key Elements:
- Reversal of the Three Pillars: On the capital front, deglobalization and the erosion of the petrodollar system are raising financing costs; on the energy front, geopolitical tensions in the Middle East and the transition to clean energy are increasing volatility; on the labor front, shortages, strikes, and strengthening unions are pushing wages higher.
- Compounding Slow Variables: Rising government debt, geopolitical friction, and the spread of populism are leading lenders to demand higher risk premiums, directly pushing up long-end yields.
- The Double-Edged Sword of AI: In an optimistic scenario, AI boosts productivity, reducing debt and inflation. In a pessimistic scenario, AI drives layoffs and increases infrastructure costs, potentially becoming a new source of inflation.
- Inertia of Market Expectations: The careers of most investors have been spent in a low-interest-rate environment. Currently, they must abandon old expectations and adapt to this structural shift, a process of adjustment that will bring real pressure.
Original Author: Long Yue, Wall Street News
The 30-year U.S. Treasury yield has once again broken above 5%. This time, the market's reaction is markedly different from 2023—investors are beginning to truly accept the reality that high interest rates are here to stay for the long term.
Analysts point out that underlying this is a deeper structural shift: the three pillars that supported low inflation and low interest rates in the U.S. over the past 50 years—cheap capital, cheap labor, and cheap energy—are simultaneously unraveling. The trajectory of AI will be the biggest unknown determining future inflation trends.
The 30-year U.S. Treasury yield has recently breached the 5% level again. Rana Foroohar, a columnist for the Financial Times, writes that unlike the brief spike above 5% in 2023 which quickly reversed, the market's reaction this time is notably different—investors appear to be finally coming to terms with the reality that the U.S. is bidding farewell to the era of low interest rates and entering a new phase characterized by more persistent and diverse inflationary pressures.
The article cites a recent note to clients from Torsten Sløk, Chief Economist at Apollo, stating, "Investors should position for a sustained high-interest-rate environment in the short, medium, and long term."
Behind this lies a larger structural story: the three cheap factors that drove U.S. economic growth for the past 50 years—cheap capital, cheap labor, and cheap energy—are all simultaneously reversing.
Where Did the Half-Century "Cheap Dividend" Come From?
The decline of the 30-year U.S. Treasury yield from over a dozen percentage points in the early 1980s to around 1% during the pandemic was no accident over nearly half a century.
It was supported by a complete set of macroeconomic logic:
Cheap Capital: Decades of globalization and advances in manufacturing technology depressed goods prices; oil-exporting countries recycled vast petrodollars back to the U.S., providing ample cheap funds; pension privatization reforms generated enormous demand for various financial products; global investors scrambled to buy U.S. Treasuries, as no country was deemed safer than the U.S.
Cheap Labor: Outsourcing of industries, the decline of unions, automation, and a "shareholder-first" corporate culture (prioritizing financial engineering over employee investment) collectively suppressed wages, especially for workers without college degrees, consistently supporting corporate profit margins.
Cheap Energy: The petrodollar system helped curb inflation to some extent, and global energy trade being settled in U.S. dollars also strengthened the dollar's global position.
These three pillars together supported the U.S.'s half-century boom of low inflation and low interest rates.
The Three Pillars Are Simultaneously Loosening
Rana Foroohar notes in her article that each of the aforementioned supporting factors is now changing.
Capital Side: At every U.S. Treasury auction, international buyers are decreasing, not increasing. Deglobalization and supply chain reshoring will push up goods and services prices in the short term. Meanwhile, the foundation of the petrodollar system is being eroded.
Energy Side: Continued tensions in the Middle East have the most direct impact on energy-importing countries in Asia. However, from a longer-term perspective, this might paradoxically accelerate the layout of major Asian countries in the clean energy sector—while the U.S. is stepping back from climate commitments. This implies that long-term capital flows might shift from the U.S. towards major Asian countries.
Labor Side: In recent years, labor shortages, large-scale strikes (including successful wage negotiations in the auto manufacturing sector), tighter immigration restrictions, and growing union membership in certain areas (especially white-collar industries) have all driven wages higher. However, this trend has been partially offset by two factors: rising corporate health insurance costs, leading companies to offset this by suppressing wages, and the impact of artificial intelligence.
A Slow Variable: Debt, Geopolitics, and Populism
Beyond these obvious factors, there are several "slow variables": rising government debt, increasing geopolitical friction, and the spread of populism.
The combined effect of these risks is that lenders demand a higher risk premium before they are willing to lend money—especially for periods spanning several years.
This directly pushes up long-end interest rates, i.e., the 30-year U.S. Treasury yield.
AI: Savior or New Source of Inflation?
Among all the variables, the trajectory of artificial intelligence is the hardest to predict, but its potential impact is the most profound.
Rana Foroohar presents two contrasting scenarios:
Optimistic Scenario: AI's productivity benefits spread widely across various industries and individuals, creating new jobs and income sources. A model from the Yale Budget Lab shows that in this scenario, the U.S. national debt would decrease significantly, and inflation would also retreat.
Pessimistic Scenario: AI is merely a tool for companies to lay off workers, cut costs, and expand profits. Meanwhile, the construction of AI infrastructure itself (consuming vast amounts of chips, land, water, and electricity) generates new inflationary pressures, with the net effect being to push up, not lower, costs. Governments would also be forced to provide relief for displaced workers, causing debt to rise instead.
Currently, major AI companies are voraciously consuming real estate, chips, water resources, and electricity, which is already driving up the prices of these resources within the overall economy. It will take years to see the final outcome clearly.
The Real Challenge Facing Investors
The article's conclusion is direct and sobering: most market participants have spent their entire careers in the "cheap era." Their instincts, models, and expectations were all calibrated in a low-interest-rate environment.
Now, that environment is changing.
"Expectation inertia" is a powerful force—after the 30-year yield breached 5% in 2023, many thought it was just a temporary anomaly that would soon fade. But this time, the market's reaction is different.
Adjustment means abandoning old expectations. For investors accustomed to low interest rates, this is no easy task.
