5%+ Is Supposed To Break Something...Right?

Well, we made it - queue fireworks, balloons, babies crying, etc.

The 10-year Treasury crossed 5%, which technically it crossed last week, but this time it decided it liked the view.

As of writing this...we are roughly at 5.2% - the highest level since 2007. The 30-year got up around 5.49%, which you have to go back more than 20 years to find.

Normally, this is the part where everyone starts screaming.

5% Treasury yields!

Higher mortgage rates!

Higher corporate borrowing costs!

Stocks are doomed!

Hide the children!

And, to be fair, none of those concerns are completely ridiculous.

When the U.S. government is willing to pay you 5%+ to lend it money for 10 years, every other asset has to compete with that.

Want me to own your stock? I need a reason to take the extra risk.

Want me to finance your new data center? Same thing.

Want to buy a house? Womp womp...sorry.

But there's something weird happening underneath all of this - the economy isn't exactly acting like 5% is killing it.

And neither are markets.

Which brings us back to our good friend (or enemy - depending on which side you take) AI.

What if AI is part of the reason rates are this high?

We've spent the last few years talking about AI mostly as a stock-market story.

Nvidia. Data centers. Chips. Power. Hyperscalers spending enough money to make "billions" sound like pocket change.

But all of that stuff has to be financed.

Reuters put it pretty simply this morning:

In English: everybody wants money at the same time. And money works like basically everything else - when demand for it goes up, so does the price.

Meta, Microsoft, Google, Amazon, Oracle and basically anyone else with a pulse are trying to build an absurd amount of computing infrastructure. That means data centers, power plants, transmission, semiconductors, land, and lots and lots and lots of capital.

There isn't an infinite pile of money sitting around waiting to finance all of this.

So AI companies are competing for capital at the exact same time Uncle Sam is standing next to them saying: "Hey...I need a few trillion too."

Sorry gramps.

And when everybody wants to borrow an absurd amount of money at the same time, lenders can demand a higher return to hand it over.

In other words: the price of money goes up. That's an oversimplification, but I'm gonna go with it.

Oil is still north of $100. Inflation isn't dead. The Fed just raised rates. The Iran situation isn't exactly helping anybody (except maybe those in power...but who am I to cast judgment? JK everyone in Washington sucks).

There's plenty pushing yields higher, but the AI piece creates a really interesting chicken-or-the-egg problem.

We've spent months asking: How high can rates go before they kill the AI boom?

Maybe we should also be asking: How much is the AI boom helping keep rates high?

Those are VERY different questions and here's where it gets even more bizarre.

Usually when long-term rates start making multi-decade highs, you'd expect something somewhere to begin having a menty-B (mental breakdown).

Instead, the S&P 500 has been remarkably stubborn.

AI spending keeps coming, economic growth has stayed strong, and today we got another interesting little nugget from the Treasury market.

The infamous "basis trade" has actually been SHRINKING.

If you've never heard of the basis trade, it's basically hedge funds borrowing a ton of money to bet that a tiny price gap between Treasury bonds and Treasury futures will eventually close.

The gap might be tiny, so they use a LOT of borrowed money to turn that tiny profit into something worth caring about.

Reuters reported today:

Still enormous.

But that's interesting because all that borrowing works great when markets behave.

When they don't? Not so much.

If Treasury prices move violently against these funds, they can be forced to come up with more cash. If they can't, they have to start dumping positions to raise it - which pushes prices around even more and can force somebody else to sell.

Sell -> prices fall (rates rise) -> more people are forced to sell -> prices fall more (rates rise more).

Remember your bond math: Treasury prices and yields move in opposite directions.

That's the "something goes BOOM" scenario regulators have worried about.

And yet, while Treasury yields have been ripping higher, the basis trade has actually gotten smaller.

So far? No BOOM.

Which leaves us with this setup:

Fed: Money needs to be more expensive.

Treasury: Please stop making long-term money so expensive.

AI companies: We'll take all the money you have.

Stock market: Pfft - whatever dad...

The important part here isn't that 5% rates are suddenly "good"...they're not.

Higher rates absolutely create pressure.

They raise the hurdle rate for investments - which is finance-speak for "if I can make 5% doing basically nothing, you better give me a pretty good reason to take risk."

They make financing more expensive, and eventually somebody who borrowed too much money at the wrong price tends to find that out the hard way.

But there's a big difference between yields hitting 5% because the economy is buckling under inflation and yields hitting 5% while the economy remains strong and the government, AI companies and everyone else are fighting over an enormous pool of capital.

The number looks the same. The WHY doesn't.

And right now, figuring out how much of each we're dealing with might be a whole lot more important than freaking out because the 10-year has a 5 in front of it.

So stay low, breathe, and keep yourself vested.