In bondage

Here’s another reason to be glad you’re not, you know, a Yank.

American mortgage rates surged to 6.75% yesterday – the highest in almost a year – as yields on bonds took off like an Elon rocket.

“Bonds are telling politicians to get serious about ending the war or face increasingly dire consequences,” said an industry spokesguy.

In Canada, mortgage rates in a few corners are a little elevated. But you can still get a decent rate (about 4%) despite an uptick in the yield on Canada five-year debt.

Now, let’s talk bonds for a moment. They trade like stocks. And, as with equities, prices are continually shifting. When folks think inflation is returning, building or feared, bonds lose value and drop in price. At the same time the yield on those bonds increases – a function of the bond selling for less while the original coupon return remains the same. In effect, you get more bang for the buck.

Inflation is the enemy of bond values, in other words. In an inflationary world debt is easier to pay, so bonds falter. In a deflationary era it’s harder to retire debt, so it becomes more valuable. In a recession, usually, bond prices will rise and yields drop. It gets cheaper to borrow.

Confused? Why wouldn’t be. Especially now.

The world’s safest assets have long been US Treasuries. To date America has issued $31 trillion in bonds, which are held by investors, corporations, pension plans and governments around the world (including ours). Yields on the longest-dated bonds (30 years) are considered a Holy Grail of the financial world, and this week jumped to the highest level in almost twenty years – 5.2% on Tuesday.

The last time we saw this was during the 2007 financial crisis when Wall Street banks were toppling and US houses were losing as much as 70% of their value. This time the Big Fears are many. Oil prices are too high and threaten the global economy. Trump has no valid off-ramp from this unfortunate war on Iran. Gas inflation has spread throughout the American economy and now threatens growth. US government deficits are spiralling, as it the national debt and the current White House will add $4 trillion to the pile.

For all this, investors are demanding more compensation to hold US debt. So bond prices drop. Bond yields jump. The borrowing cost to government soars – which leads to more deficit financing and the need to, yes, borrow more. It’s a vicious circle.

And there’s more to worry about.

The US central bank, the Fed, has a new boss – Kevin Warsh. He’s a Trump guy, and the president has made it clear he wants lower interest rates. Like, drastically lower. Every economist of merit argues a rate cut would just fuel the inflation that oil, war and profligate political spending are creating.

Before the Trump War markets were pricing in maybe three rate cuts in 2026. Now they expect none, with most people arguing the Fed’s next move should be to increase the cost of money – just like the bond market is suggesting.

Can Warsh resist Trump? Will he? What would be the consequences if he did not?

By the way, this stuff is not contained to the US. Long bonds (called Gilts) in the UK now have a yield around 6%, while the same is happening in Germany. A recent auction of 30-year Treasuries, by the way, found lacklustre interest among buyers and ended up having the highest yields in thirty years.

Well, should you worry?

There’s no point. All this stuff – war, Trump, inflation, government spending, geopolitics and global trade – is out of our control and with inescapable consequences. Like the weather. All you can do is dress properly.

For most people, that means staying with a balanced 60-40 portfolio, heavier on equities but with a fixed-income component of bond ETFs (while throwing in some REITs and preferreds). If you really worry about America’s unfathomable debt, some analysts suggest reducing the bond exposure in your portfolio and throwing more gas on stocks. But with that comes enhanced volatility you may have to explain to your spouse.

We all need to understand the consequences of spending more than we have. Bonds borrow from the future. When we get there, be ready.

About the picture: “Please do not post any more cat photos,” writes Craig. “Very few show any personality though I have encountered a few cool ones. Could you imagine a cat performing any task other than sleeping, killing and eating? This little guy was working the front desk at a hotel in Spain where I stayed. El Jefe! Thanks for your blog. Always educational and often entertaining.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2026/05/20/in-bondage/