Why Liberals View Rising Bond Yields as Negative News

The surge in longer-term bond yields has prompted a largely negative response from many in the financial media. But why is that the case?

Financial outlets have often connected rising bond yields to investor concern over inflation or the scale of the U.S. government’s debt. A recent report from Reuters, for instance, suggested that the bond market is convinced the Federal Reserve must increase interest rates to combat inflation and maintain its credibility.

However, this anxiety is somewhat exaggerated. The uptick in bond yields isn’t primarily about heightened inflation expectations. By examining what’s known as the breakeven rate—the difference between the yield on a standard 10-year Treasury and that of a 10-year inflation-protected Treasury (TIPS)—we can determine how much yield is influenced by anticipated inflation. This breakeven rate essentially indicates the inflation rate over the next ten years at which investors would expect comparable returns from either bond type.

The current breakeven rate is approximately 2.34 percent, which aligns fairly well with the Fed’s target of two percent inflation since the Consumer Price Index (CPI) tends to be slightly above the Fed’s preferred Personal Consumption Expenditures (PCE) measure. Interestingly, this rate is just nine basis points higher than at the beginning of the year and five basis points below last year’s breakeven rate.

What’s driving the rise in yields is related to the real yield. This reflects what investors require as compensation for tying up their money in long-term bonds as opposed to other financial opportunities. Typically, real yields increase when other investment options become more appealing. Essentially, more compensation is required for the opportunity cost of holding bonds. A broader improvement in the economic outlook often leads to a rise in real yields.

This isn’t about a complicated financial theory. It’s quite straightforward—so much so that one might wonder why this basic concept has eluded the attention of many otherwise attentive financial journalists.

Liberal Sentiment: A Perspective of American Despair

The simplest explanation for this viewpoint is rooted in liberal pessimism. Many liberals seem to have adopted a rather bleak outlook on the U.S. and its economy. If you genuinely believe that everything is heading toward disaster, then every development appears to be another step closer to that outcome.

It’s not difficult to observe this sense of despair among liberals. Various surveys highlight this sentiment. For instance, a recent Economist/YouGov poll asked American adults about their perceptions of the American Dream: 63 percent of moderates and 77 percent of conservatives believed it was still alive to some extent. In stark contrast, only 34 percent of liberals feel any semblance of life in the American dream, with 66 percent claiming it’s “not really alive.”

When looking at overall figures, 57 percent of Americans believe the American Dream is still very much or somewhat alive, while 43 percent disagree. This indicates that liberals are notably out of step with the broader public sentiment on whether this dream endures.

Perhaps unexpectedly, young people, typically seen as facing the worst economic circumstances today, are more optimistic than liberals. A considerable 59 percent of young individuals feel the American Dream is somewhat or very much alive.

The same survey posed 13 different potential threats to the American Dream, asking respondents to rate them as severe, somewhat threatening, or not threatening at all. The biggest threat, according to the highest percentage of liberals identifying it as severe, was inflation—82 percent felt this way. This concern outweighed classic liberal priorities like climate change, reductions in government welfare programs, and declining education.

Given this context, it makes sense that despairing liberals in media circles interpret rising bond yields as indicative of inflation anxiety. For them, the connection seems almost unavoidable, especially in light of their somber view of the American dream and the relevance of inflation to that perspective.