Posted:September 10, 2026
Categories: Bond Market, Central Bank, Economy, Government Bond Yields, US Treasuries
“The most encompassing view of interest is contained in the notion of interest as the ‘time value of money’ or, simply, as the price of time.” Edward Chancellor1
I’ve been thinking a lot about time recently. My 98-year-old Grandma, Jean Summers, recently passed away peacefully, family at her side. It was an honor for my family, along with my Mom and Aunt, to be with Grandma Jean during her final hours. She lived a long and satisfying life, “full of days”, as the Bible describes. I have many fond memories of my Grandma: listening to her stories, playing cards, walking the beach, and enjoying Florida seafood. She, like her mother, lived a long and fruitful life and left a legacy for our family. This is a beautiful picture of how families and legacies transition with the passage of time.
The Value, or Price, of Time…
As I started my research for this article, the passing of my Grandmother had my mind stuck on the idea of “time.” This led me to revisit one of my favorite books, The Price of Time, by Edward Chancellor. In his book, Chancellor argues that interest represents the rate at which present consumption (spending) is exchanged for future consumption (savings). Thus, the concept of interest relies on “time preference.” As the saying goes, “a bird in the hand is worth two in the bush.” Because human nature is naturally impatient and our lives are short, Chancellor argues humanity requires a reward (interest) to delay gratification from current consumption.2
He also argues that in a truly free market, interest rates are determined by “real” economic factors. This can include the supply and demand for savings, productivity of capital, and society’s collective time preference.3 Unfortunately, as it relates to the level of interest rates, financial markets are not truly free given the existence of central banks using interest rates as a lever to control inflation. Furthermore, our paper-money (fiat) system allows central banks and governments to manipulate interest rates to achieve their policy goals. This means central banks will deliberately depress interest rates to stimulate economic activity. The outcome generally involves discouraging consumers from saving, artificially boosting spending, spurring economic growth, inflating asset bubbles, and allowing “zombie” companies to survive.4
Therefore, determining the natural level of interest rates becomes a tall task for investors, economists, and asset allocators. Interest rates have been a focus in financial news lately, and global bond markets have garnered significant attention as long-term rates have trended higher worldwide. While the media loves to sensationalize markets, such as insisting the world is on the verge of a global debt crisis, I push back on this notion. Yes, debt levels are historically very high. Yes, fiscal spending is out of control. However, my assertion is that the rise in bond yields is not yet indicating a crisis. Rather, to me, we’re seeing a natural reassertion of the true “price of time” after a long stretch of central bank manipulation.
Long-Term Cycle of Interest Rates
Interest rates have historically moved in long-term cycles, as shown in the chart below. This chart shows the 10-year U.S. Treasury rate over the past 200 years. The average interest rate cycles have lasted around 25 years. The last two cycles were longer, at 35 years and 40 years, respectively. The current cycle of rising interest rates clearly reversed in 2022, indicating we are very early in the current cycle.
Figure 1: 200 Years of Interest Rates in the U.S.
Source: Oxbow Advisors
Below we can observe global interest rates across six advanced economies since 2006 (see Figure 2). It’s clear that yields have been rising consistently since 2022. The sensationalist nature of the media acting like this is some kind of new phenomenon is clearly exaggerated. Rates have been moving higher for over four years now.
Figure 2: Rising Interest Rates
Source: Robin Brooks
Next, consider the chart below, which shows the full spectrum of US Treasury interest rates, from short- to long-term, over the past 100 years.
The average interest rate on the 10-year U.S. Treasury has been 4.8% since 1928 and 6.0% since 1971. The current rate of roughly 4.8% looks pretty “normal” given this context.
The average interest rate for the 3-month U.S. Treasury Bill has been 3.4% since 1928 and 4.5% since 1971. The current rate of roughly 3.9% also looks pretty “normal” given this context.
Given the current Federal Funds rate range of 3.50% to 3.75% and a normal, upward-sloping yield curve, you could see the curve look something like this:
Given these levels, interest rates appear to be trending toward historical norms for a growing economy.
Figure 3: U.S. Treasury Rates since 1920
Source: Goldchartsrus.com
Nominal GDP and the 10-Year Treasury
Historically, the 10-year Treasury tracks the country’s Nominal Gross Domestic Product (NGDP) growth rate. NGDP is simply the real GDP growth plus inflation. In other words, the natural return on capital should comprise the country’s real productivity gains plus inflation. Figure 4, courtesy of author Michael Howell, shows this relationship since the 1950s. The current NGDP growth in the U.S. is around 6-8%, representing the fastest growth since the mid-1980s. Howell argues that this presents a case for higher 10-year yields, perhaps moving towards 6%. This strong growth is coming from both public-sector (government) demand and private-sector capital demand.
Figure 4: Nominal GDP Growth & 10-Year Yield
Source: Capital Wars
Public Sector Capital Demand
As I’ve stated before, the U.S. is in a regime of “Fiscal Dominance,” meaning that public debt service increasingly dictates monetary policy. The U.S. Treasury must refinance about $8 trillion to $10 trillion in debt over the next 12 months. The U.S. is also running a budget deficit of roughly 6-7% of GDP, requiring the government to issue $1 trillion in net additional debt every three to five months. This has skyrocketed total interest expense in the U.S. to around $1.2 trillion. Recall, though, that “one man’s debt is another man’s asset.” That $1.2 trillion is flowing to asset owners, commercial banks, defense contractors, strategically important corporations, and wealthier and older demographics benefiting from Social Security and Medicare payments.
Furthermore, the U.S. Treasury has been issuing more short-term bills and fewer long-term bonds. Commercial banks are large buyers of short-term U.S Treasury Bills. However, given our fractional-reserve system, banks use these as collateral to extend credit to their customers, including mortgages, car loans, and commercial loans. Thus, commercial banks are essentially “monetizing” the deficits. As bank credit increases, so does growth.
Private Sector Capital Demand
Simultaneously, the private sector, especially corporations tied to AI, have launched the most capital-intensive infrastructure builds in modern history. The AI buildout requires physical resources and massive capacity on the electric grid. Recently, much of this has been financed through debt issuance and bank credit.
In a recent article, Professor Aswath Damodaran noted that total cumulative investment from just six key AI hyperscalers and developers (Alphabet, Amazon, Meta, Microsoft, Oracle, and Coreweave) has reached $1.7 trillion over the past few years (see Figure 5). He added that current corporate guidance projects trillions of dollars in further spending, known as capital expenditures (”Cap Ex”) commitments over the next three to four years.5
When the public sector is desperate to fund its deficits and the private sector is desperate to build out AI, they compete for the same pool of global savings. Historically, government borrowing has squeezed our private-sector borrowing. Today, the reverse is occurring. Naturally, this will put upward pressure on the interest rates of U.S. Treasury securities.
Figure 5: AI Cap Ex
Source: Aswath Damodaran
Managing the Supply: U.S Treasury Interventions
U.S. Treasury Secretary Scott Bessent finds himself in a difficult position. He must sell trillions of bonds, yet not allow interest rates to rise further or risk blowing out the debt. He must also work hard to suppress market volatility. And finally, he must placate our large corporations building out AI, as it’s become strategically important for the U.S. to outcompete China in the AI race.
It’s for these reasons that you see Bessent intervening in both Japan’s bond market and the U.S. via yield-volatility control, buybacks of illiquid off-the-run debt, and increased short-term issuance. However, as I argued in my article on the Japan Intervention, the choice for a sovereign nation is to either save the bond market or the currency. Clearly, Bessent is working very hard to save the bond market. As for the dollar, it remains in a good position relative to other fiat currencies but is very weak relative to gold. Gold will benefit from increased dollar issuance and interventions, both of which are inflationary. For interest rates, it appears that all else being equal, long-term bond yields are likely to remain high and may move higher should growth remain robust.
Closing
At the end of the day, it’s wise to remember that forecasting interest rates is incredibly difficult. As Chancellor says in the first chapter of his book:
“How the level of interest rates is determined remains one of the most perplexing problems in the field of economics…” Edward Chancellor6
Yet, he devotes 312 pages to deciphering interest rates. As investors, we must also devote time to this almost impossible task. After all, everyone is either a debtor or a creditor in our financial system. What we do with the capital we earn is our choice to make. We must all determine our own time preference and how we interact with the “price of time.”
References
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