Episode summary
Can the US Defy Fiscal Gravity?
Wall Street Week
· · Guests: David Bianco, Robin Brooks, Sigrid Kaag
Summary
Long-term Treasury yields and real rates have climbed to levels not seen in nearly 25 years, but the guest argues inflation is not the main cause. He says the deeper driver is structural: U.S. deficits above 6% of GDP, a rising debt burden, and the need to finance more borrowing domestically as foreign buyers pull back. In his view, the market is reacting to fiscal arithmetic more than to the Fed or short-term inflation data.
He is skeptical that Treasury Secretary Scott Bessent’s effort to influence the long end of the curve will work, and says the Treasury should not be trying to do the Fed’s job. He warns that any attempt to suppress long rates risks unsettling investors, weakening the dollar, and pushing money toward gold and other inflation hedges.
Despite the higher yields, he says the U.S. stock market can still do well because corporate America is not the same as the U.S. economy. He sees tech as least vulnerable to higher rates, arguing data-center spending is driven more by return on capital than by small changes in financing costs. A separate discussion with Robin Brooks and Sigrid Kaag agreed the U.S. fiscal path is dangerous, even if reserve-currency status delays market discipline.
Key takeaways
- The guest says the real driver of higher long-term yields is a structural fiscal problem, not inflation alone, with deficits above 6% of GDP likely to persist.
- He argues the U.S. must fund more debt domestically because China is buying fewer Treasuries and other foreign buyers are less reliable.
- He thinks Treasury efforts to influence long rates are inappropriate and could fuel concerns about debasement, financial repression and a weaker dollar.
- He sees tech as relatively insulated from higher yields because the debate is about returns on AI data-center investments, not the cost of capital.
- Robin Brooks and Sigrid Kaag say the U.S. is on a dangerous fiscal course, but reserve-currency status gives policymakers time before a reckoning.
Notable quotes
“The main reason that real interest rates are so high is secular nature. And it is the deficit”
“It needs to be funded more domestically. We have a new world trade order”
“I don't think it's going to work. Maybe our Treasury Secretary is, you know, taking-- inspired by our president”
“The U.S. is a reserve currency in the sense that it's the currency that gives access to so many dollar-based assets”
“the signals to U.S. policymakers who are supposed to be getting a signal to rein in fiscal policy and get the deficit under control, unfortunately, those signals aren't being sent from the market”
How the episode opens
Westin: This is a story about what's around the corner. Interest rates have crept up in recent weeks with uncertainty over future Fed cuts, concerns about inflation and record borrowing in the public and private markets, with both governments and companies rushing to invest in artificial intelligence. Loaning money at higher rates sounds good, provided you can see around that corner to make sure you'll get paid back.
David Bianco is Chief Investment Officer for the Americas at DWS Group, which has about one trillion dollars in assets under management. So, David, this summer we have seen sort of a gradual rise in yields, maybe across the curve, but particularly on the long end of the curve. What's causing that?
-This summer, longer end of the curve, Treasury bonds and notes, the yields have been rising. And we've noticed during the summer that yields, and especially real yields, have gotten to some of the highest levels they've been in nearly 25 years since before the financial crisis of 2008-9. There are a bunch of causes to it.
This has been playing out over some time. So you're saying, yes, it's been a gradual rise in yields, but we've gotten to the point where a lot of people turn around and say, "What happened here? "These are really high interest rates, "high real interest rates.
"What's happened? What I think is interesting to note is that even though topics like inflation, which remains above the Fed's target for more than 5 years, that's important. And there's a lot of future inflation uncertainty.
And we always talk about things like employment and growth. That to me isn't the main reason why yields have climbed to these levels and to new highs in the past 25 years this summer. The main reason that real interest rates are so high is secular nature.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- treasury yields
- real rates
- us fiscal deficits
- debt-to-gdp
- dollar safe haven
Companies and tickers mentioned
- DWS
- Brookings Institution
Watch the episode
Watch “Can the US Defy Fiscal Gravity?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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