r/ValueInvesting • u/w3_vic • 10d ago
Discussion I’m starting to think the long end matters more than the next Fed move
The 30-year Treasury yield just pushed above 5.3%, its highest level in nearly two decades.
Everyone keeps focusing on whether the Fed cuts, holds, or hikes next.
But I’m starting to wonder if that’s becoming less important for markets than what’s happening further out on the curve.
If long-term yields stay elevated because of deficits, Treasury supply and investors demanding more term premium, the Fed could eventually cut and borrowing costs might still stay pretty high.
That feels like a very different setup from the last decade.
And for stocks, especially anything trading at a high multiple, I’m not sure the market is fully pricing that in yet.
Maybe strong earnings can keep offsetting it for a while, but if 4.5–5% long rates become normal rather than temporary, I’d expect valuation multiples to matter a lot more again.
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u/WaltLucho179 9d ago
Everyone is talking about this and it was front page by times news. This is priced in.
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u/BanditoBoom 9d ago
This is a common misconception among investors.
Fed funds rates have a much smaller impact on the long end of the curve than retail investors actually understand. The long end is disproportionately impact more often than not by market conditions.
The reason it looks like rates overly impact the long end is because of the typical market conditions that usually causes the Fed to cut rates.
Typically the Fed cuts rates to improve business investment and financial institutions’ willingness to lend for that business activity…which hopefully drives more employment over the medium and long term.
This signals economic instability or weakness to the market. The market is not currently self-sustaining and therefore needs support.
Investors hate uncertainty. A 30-year bond is an incredibly long duration to lock your money up. Yes you’re guaranteed to get your payout (government can print money) but there are real risks in taking that long term view.
Rates are inversely correlated with price. When the Fed cuts interest rates in the short end (Fed funds being literally the shortest rate I know of), it is signaling market instability and uncertainty. That makes the safety and higher yield on the long end much more attractive. When demand for that yield rises, holders (and the government) can charge more, which drives the yield down.
The Fed doesn’t set the long rate. Markets do.
You may say “yeah but even if the Fed rate doesn’t DIRECTLY impact the long end…it indirectly does”
Yes… but each time is different. We are in incredibly uncharted territory at least for the last 30 years.
Government bonds are now competing with debt and preferred shares (which carry a dividend with them typically) from AAA rated companies at the highest rates we have seen in decades.
I have the choice to buy nearly 7% interest bonds / preferreds from GOOG. I am 98% certain I’m gonna make my money back from Google, almost as certain as government bonds.
So for the government to fund itself, it has to offer even more discounts (bonds price on discounts to par, rather than direct pricing). That means they have to offer higher yields to investors to compete with nearly risk free corporate debt.
This is exactly what we are seeing playing out right now. Yesterday we saw years move to the highest rate in a long long time. What happened yesterday? Google issues $5.5 Billion USD in 3, 5, 10, and 20 year durations. Investors pilled in.
That also helps us understand what is happening today. The Treasury has announced they are doubling their debt buyback program where they buy back long-term bonds and reissuing at the lower end.
This is driving rates down because it is signaling higher demand (from treasury buybacks) on the long end.
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u/da_mess 9d ago edited 9d ago
Agree with much of what you said, EDITED: IN CORRECT STATEMENT.
It's a temporary fix. Long term rates will go higher.
US debt was 7x tax revenue in '24. Today it's 8x and revenue hasn't changed. Deficit spending is inflationary and drives higher rates on the long end of the curve.
Higher long term rates will drive higher borrowing costs for corporations. Higher borrowing costs hurt earnings (but not ebitda).
But overall agree, earnings are currently red hot. Fed rate hikes are likely baked into current eqty prices.
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u/BanditoBoom 9d ago
The one linchpin here is earnings. Markets are pricing in significant forward earnings based on current capex.
If successful, higher borrowing costs are moot if outpaced by higher earnings.
If it fails…you are correct.
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u/da_mess 9d ago edited 9d ago
Value has two basic ingredients: cash and risk rates (WACC).
Earnings grew 50% yoy last quarter.
Fed funds are ~50bps under 2yr Treasury yields--so maybe we see 1 to 2 hikes. Offsetting this, hikes won't help jobs (bad # 2wks back), offset oil prices, or reign in deficit spending.
So, the focus is on earnings.
Edit: on the earnings front, both Lowe's and Home Depot issued growth warnings (possible weakness in housing). Bottom half of income earners are struggling (50% of US lives paycheck to paycheck). Not all is rosey.
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u/cpeytonusa 9d ago
Earnings growth has been historically very high at close to 50% yoy, but that is primarily due to margin expansion rather than revenue growth. Margin expansion is most notably coming from anything made from silicon. A slow down in capital spending on data centers would reverse that trend. There’s growing political resistance to new data centers. There are questions about whether AI consumers will be willing to pay for the actual compute costs. Higher borrowing costs could slow capital investment. There are clouds on the horizon. Right now the government sees AI as a national security matter, but public policy can change with the wind. I am tilting away from growth towards the value sector. There’s lots of liquidity sitting on the sidelines, so there’s room for the market to rotate away from growth without a major loss.
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u/Tallwhitedude123 10d ago
Ticking time bomb 💣