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Bond markets are flashing red. Today, the US 30Y Note Yield officially hit its highest level since July 2007, at 5.19%. This will soon become Americans’ biggest problem, yet the vast majority do not even know it is happening. What is happening? Let us explain. (a thread)
First, it is truly incredible how quickly we ended up in this situation. Prior to the Iran War, yields were finally dropping after years of persistent inflation. The 10Y Note Yield was down to 3.92%. 80 days later, it is up +75 basis points. That is a MASSIVE move in yields.
In the early days of the Iran War, US Treasury Yields moved higher, but the move was largely contained. Consensus was that the Iran War would be brief and the Strait of Hormuz would not remained closed. Today, both Iran and the US have closed Hormuz and traffic remains near 0.
With oil prices at $100+/barrel for nearly two months, inflation is back in full-swing. US PPI inflation just hit 6.0% and US CPI inflation hit 3.8%, both at the highest since 2023. As inflation rises, long-term interest rates rise to compensate lenders for this risk.
We are now seeing the worst inflation since the post-pandemic recovery. Since the start of the Iran War, jet fuel prices are up +58%, gas prices are up +52%, and fertilizer prices are up +20%. All of these costs are flowing through the various categories of CPI inflation.
As time progresses, inflation appears to be increasingly tracking with its late-1970s path. After an initial surge in inflation was contained, a second spike caught many off guard, largely due to surging oil prices. This time around, we have a somewhat similar backdrop.
On top of this, the US deficit spending crisis is only getting worse. The budget gap just hit $1.2 trillion over the first 6 months of FY2026, the 3rd-worst ever. US debt is at a record $39 trillion and the bond market is being flooded with issuances to cover deficit spending.
What does this all mean for Americans? Higher interest rates are on the way. At the start of the year, markets saw up to 4 Fed rate CUTS in 2026. Now, the odds of the Fed HIKING rates in 2026 are up to 36%. The base case assumption is the Fed's next move being a rate HIKE.
Mortgages are becoming even more expensive as a result. The average rate on a 30Y fixed mortgage in the US is now up to 6.68%. It was below 6% before the Iran War. We believe the average rate on these mortgages will cross above 7.00% soon. Inflation is simply too hot.
In April 2025, President Trump said he was watching the bond market when he decided to announce his "90-day tariff pause." The 10Y Note Yield is now above the peak seen then. At what point will the US have to intervene? Simply put, the US economy cannot handle 5%+ yields.
There has arguably never been a market with more disruption than now. For investors, this means more opportunity to capitalize on volatility. Want to see how we are approaching it? Subscribe to access our premium analysis and alerts at the link below: <a target="_blank" href="http://thekobeissiletter.com/subscribe" color="blue">thekobeissiletter.com/subscribe</a>
Lastly, our view of "own assets or be left behind" is only gaining more momentum. This is exactly why the S&P 500 just added +$11 TRILLION in 7 weeks. The market is bracing for AI expansion and inflation. Follow us @KobeissiLetter for real time analysis as this develops.
