30-year US Treasury yield breaks above 5% again, the era of "everything is cheap" comes to an end

Original author: Long Yue, Wall Street Sights

The 30-year US Treasury yield has once again broken through the 5% mark. This time, the market's reaction is markedly different from 2023—investors are beginning to genuinely accept the reality that high interest rates are here to stay.

Analysis suggests that underlying this shift is a deeper structural transformation: the three pillars that supported low inflation and low interest rates in the US over the past 50 years—cheap capital, cheap labor, and cheap energy—are simultaneously unraveling. The trajectory of AI will be the biggest unknown factor determining future inflation trends.

The 30-year US Treasury yield has recently broken above 5% again. In a column for the Financial Times, Rana Foroohar notes that unlike the brief spike above 5% in 2023, which quickly reversed, this time the market's response is distinctly different—investors finally seem to be accepting the reality that the US is moving away from the era of low interest rates and entering a new phase where inflationary pressures are both more persistent and multifaceted.

The article cites a recent note from Apollo Chief Economist Torsten Sløk to clients, stating, "Investors should position themselves 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 US economic growth for the past 50 years—cheap capital, cheap labor, and cheap energy—are all now reversing simultaneously.

Where Did the Half-Century of "Cheap Dividends" Come From?

The 30-year US Treasury yield, which fell from over ten percent in the early 1980s to around 1% during the pandemic, was no accident.

It was supported by a complete macroeconomic logic:

Cheap Capital: Decades of globalization and manufacturing technology advancements kept commodity prices low; oil-exporting countries recycled vast amounts of petrodollars back into the US, providing abundant cheap capital; pension privatization reforms generated immense demand for various financial products; global investors flocked to buy US Treasuries because no other country was considered as safe.

Cheap Labor: Offshoring of industries, the decline of unions, automation, and the rise of a "shareholder-first" corporate culture (prioritizing financial engineering over employee investment) collectively suppressed wages, especially for non-college-educated workers, sustaining corporate profit margins.

Cheap Energy: The petrodollar system helped to contain inflation to some extent, while global energy trade settled in dollars also reinforced the US dollar's global dominance.

These three pillars together supported the US's half-century of low inflation and low interest rate prosperity.

The Three Pillars Are Simultaneously Weakening

In her article, Rana Foroohar points out that each of these supporting factors is now changing.

Capital Side: At every US Treasury auction, international buyers are decreasing, not increasing. Deglobalization and supply chain reshoring will push up the prices of goods and services in the short term. Meanwhile, the foundation of the petrodollar system is being eroded.

Energy Side: Ongoing tensions in the Middle East have the most direct impact on Asian energy-importing countries. However, in the longer term, this might conversely accelerate major Asian countries' investments in the clean energy sector—while the US is stepping back from its climate commitments. This means long-term capital flows might shift from the US towards major Asian countries.

Labor Side: In recent years, labor shortages, large-scale strikes (including successful wage negotiations in the auto industry), tighter immigration restrictions, and growing union membership in some sectors (especially white-collar industries) have all driven wage increases. However, this trend is partially offset by two factors: rising corporate health insurance costs, which firms tend to counterbalance by suppressing wages, and the impact of artificial intelligence.

Another Slow Variable: Debt, Geopolitics, and Populism

In addition to these obvious factors, there are several "slow-burn variables": rising government debt, escalating geopolitical friction, and the spread of populism.

The combined effect of these risks is that lenders demand a higher risk premium to part with their money—especially for periods of several years.

This directly pushes up long-end interest rates, namely the 30-year US Treasury yield.

AI: Savior or a New Source of Inflation?

Among all the variables, the direction of artificial intelligence is the hardest to predict, but its impact could be the most profound.

Rana Foroohar presents two starkly different scenarios:

Optimistic Scenario: The productivity benefits of AI spread broadly across industries and individuals, creating new jobs and income sources. Models from the Yale Budget Lab show that under this scenario, US national debt would decrease significantly, and inflation would recede.

Pessimistic Scenario: AI is merely a tool for companies to lay off workers, cut costs, and expand profits. Meanwhile, the very infrastructure buildout for AI (consuming vast amounts of chips, land, water, and electricity) itself creates new inflationary pressures, with a net effect of raising, not lowering, costs. Governments will be forced to intervene to support displaced workers, leading to higher debt.

Currently, AI giants are consuming enormous amounts of real estate, chips, water resources, and electricity, which is already pushing up the prices of these resources across the broader economy. The ultimate outcome will take years to become clear.

The Real Challenge Facing Investors

The article's conclusion is direct and sobering: Most market participants have spent their entire careers in the "era of cheapness." Their instincts, models, and expectations were all calibrated during a period of low interest rates.

Now, that environment is changing.

"Expectation inertia" is a powerful force—when the 30-year yield broke 5% in 2023, many assumed it was a temporary anomaly that would soon retreat. But this time, the market's reaction is different.

Adjusting means abandoning old expectations. For investors accustomed to low interest rates, this is no easy task.

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