The 30-year U.S. Treasury yield breaks above 5% again, marking the end of the era where "everything was cheap."

Author: Long Yue, Wall Street Insights

The 30-year U.S. Treasury yield once again surpasses 5%. This time, the market’s reaction is markedly different from 2023 — investors are beginning to truly accept the reality that high interest rates will persist long-term.

Analysis indicates that behind this is a deeper structural shift: the three pillars supporting America’s low inflation and low interest rates over the past 50 years — cheap capital, cheap labor, and cheap energy — are simultaneously disintegrating. Meanwhile, the trajectory of AI will be the biggest unknown in determining future inflation trends.

The 30-year U.S. Treasury yield recently again broke through 5%. Rana Foroohar, a columnist for the Financial Times, pointed out that unlike the brief spike above 5% in 2023 followed by a quick retreat, this time, the market’s response is clearly different — investors seem to finally accept a new reality: the U.S. is bidding farewell to the era of low interest rates and entering a new phase characterized by more persistent and diversified inflation pressures.

The article cites a recent report from Apollo’s chief economist, Torsten Sløk, sent to clients, stating, “Investors should prepare their positions for a sustained environment of high interest rates in the short, medium, and long term.”

Behind this is a larger structural story: the three major cheap factors driving U.S. economic growth — cheap capital, cheap labor, and cheap energy — are all reversing simultaneously.

Half a Century of “Cheap Dividends”: How Did It Happen?

The decline of the 30-year Treasury yield from double digits in the early 1980s to around 1% during the pandemic was not accidental.

There is a comprehensive macroeconomic logic behind this:

Cheap Capital: Decades of globalization and advances in manufacturing technology suppressed commodity prices; oil-exporting countries repatriated large amounts of petrodollars to the U.S., providing abundant cheap funds; pension privatization reforms created huge demand for various financial products; global investors flocked to buy U.S. debt because no country is safer than the U.S.

Cheap Labor: Outsourcing, the decline of unions, automation waves, and corporate cultures prioritizing shareholders (focusing on financial engineering and minimizing employee input) collectively suppressed wages, especially for non-college-educated workers, sustaining corporate profit margins.

Cheap Energy: The petrodollar system helped contain inflation to some extent; global energy trade settled in dollars, reinforcing the dollar’s global dominance.

These three pillars together supported half a century of low inflation and low interest rate prosperity in the U.S.

The Three Pillars Are Unraveling Simultaneously

Rana Foroohar pointed out in the article that each of these supporting factors is now changing.

Capital Side: Each U.S. Treasury auction sees fewer international buyers rather than more. De-globalization and supply chain reshoring will temporarily push up prices for goods and services. Meanwhile, the foundation of the petrodollar system is being eroded.

Energy Side: Ongoing tensions in the Middle East have the most immediate impact on Asian energy-importing countries. But in the longer term, this may accelerate major Asian powers’ investments in clean energy — while the U.S. is retreating from climate commitments. This suggests long-term capital flows might shift from the U.S. to Asian giants.

Labor Side: Recently, labor shortages, large-scale strikes (including successful protests in the auto industry), tighter immigration restrictions, and growth in union membership in certain sectors (especially white-collar industries) have driven wages higher. But this trend is partially offset by two factors: first, rising employer healthcare costs lead companies to suppress wages; second, the impact of artificial intelligence.

There’s also a slow-moving variable: debt, geopolitical tensions, and populism

Beyond the obvious factors, there are several “slow variables”: rising government debt, escalating geopolitical frictions, and the spread of populism.

The combined effect of these risks is that lenders demand higher risk premiums before lending — especially for loans spanning multiple years.

This directly pushes up long-term interest rates, including the 30-year Treasury yield.

AI: Savior or New Inflation Driver?

Among all variables, the trajectory of AI is the hardest to predict, but its potential impact could be the most profound.

Rana Foroohar presents two very different scenarios:

Optimistic Scenario: AI’s productivity benefits widely diffuse across industries and individuals, creating new jobs and income streams. Yale University’s budget lab models show that in this scenario, U.S. national debt would significantly decline, and inflation would also fall.

Pessimistic Scenario: AI is merely a tool for companies to cut jobs, reduce costs, and expand profits, while the infrastructure buildout (which consumes大量 chips, land, water, and electricity) actually creates new inflationary pressures, resulting in higher rather than lower costs. Governments may be forced to intervene to support displaced workers, leading to increased debt.

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

The True Challenge for Investors

The article’s conclusion is straightforward and clear: most market participants have spent their entire careers in the “cheap era.” Their instincts, models, and expectations are calibrated to a low-interest-rate environment.

And now, that environment is changing.

“Expectational inertia” is a powerful force — after the 2023 breach of 5% in the 30-year Treasury yield, many believed it was just a temporary anomaly that would quickly revert. 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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