Will the rising 10-year treasury prick the US bubble?

Gold, bonds and the dollar are sending a very different economic signal

September 29, 2026

The great US asset reckoning: When rising rates finally bite

The US 10-year Treasury has been rising at an unprecedented pace since the start of this decade. From an all-time low of 0.32% in March 2020, it is at 5.22% as of Sep 2026. While such a pace of increase, and a rather sustained one at that, ought to have dampened equities, housing, and GDP growth, we have not seen anything to that effect. But it’s still very early days in the bond bear market (or, viewed differently, the rising interest-rate regime), and it is only a matter of time before these assets follow bonds. The inevitable gravity-like downward pull that rising interest rates will bring upon these asset valuations is imminent.

When we talk about higher interest rates depressing asset valuations, let us look at the one asset that higher rates lead to an increase in the price of, i.e., gold. To correct an important flaw, it is not that higher rates increase the price of gold, but the other way around. The correct economic perspective is that monetary inflation leads to price inflation; higher price inflation increases the price of gold; and that same price inflation also forces central banks to hike rates.

Most analysts would tell you that rising rates would depress gold prices. The rationale provided is that gold is a non-yielding asset, and so the attractiveness of holding the US dollar vis-à-vis gold increases with rising rates. But over the 6-year period of rate hikes mentioned above, gold prices have nearly tripled, from $1,580 in Jan 2020 to date.

As I will explain, gold prices (and other commodities like copper, wheat, crude oil, etc.) are positively correlated with interest rates; that is, gold prices and interest rates move in the same direction. But before getting into the rationale, it helps to look at the data first.

Since gold became a free-floating commodity in 1971, the Fed funds rate has risen in 3 sustained periods. The first was the most pronounced, between 1971 and 1981, when gold prices rose nearly 25-fold as interest rates increased from 5.5 to 19%. The second was a more muted increase, from 4.7 to 5.25%, between 1999 and 2007. During this period of modest interest-rate increases, gold prices tripled from around $250 to $800/oz. We are living through the 3rd period of rising interest rates right now, and this trend is likely to continue for the next 5 years, if not longer.

What does a sustained period of increasing rates indicate? At the most fundamental level, it shows that the Fed has been behind the price inflation curve for an extended period. No other rationale exists for a central bank to continually raise interest rates.

On an annualized basis, 2020 was the last year in which price inflation was below 2%. Even on a monthly basis, Feb 2021 was the last calendar month in which price inflation was below 2%. So, for 67 months in a row, price inflation has been above the Fed’s self-imposed 2% ceiling. And that too, based on a pitiful self-appraisal of the US government.

If we use independent assessments of price inflation (such as the one by Shadow Government Statistics below), then the US government numbers underreport price inflation by more than 5 percentage points every year since the mid-1990s.

So, within the 3rd period of sustained rate increases mentioned above, we are set for the second wave of the price inflationary spike in the months ahead; the first, of course, occurred during the Biden era, courtesy of the monetary inflation under Trump 1.0.

Enough on why interest rates and gold prices are positively correlated. Now let’s return to rising 10-year Treasury rates and the naked swimmers they’ll expose in the months and years ahead.

The US Federal government’s bankruptcy

Fast-forward to September 2027, when the next US fiscal year ends. The national debt is likely to be around $43 trillion even without a major crisis, and a 5% interest rate would mean “Interest on National Debt” is over $2.1 trillion on Federal revenues of around $6 trillion. I am ignoring the other debt in the form of Social Security and Medicare promises that are well over $100 trillion, and the cost of Medicare services is rising much faster than the interest rate on the national debt.

But even the official/ explicit interest paid today is more than 33% of revenues. Even Wall Street, drunk on cheap money for decades, can ignore the bankrupt nature of the U.S. Federal government’s finances for only so long. Now what happens if these interest rates go to 6%, which would still be historically low, except for the post-GFC 2008 period?

That’s why Bessent is desperate to get the rate below 5%, and the US Treasury is buying back long-dated bonds to suppress 10- and 30-year Treasury rates. The US Treasury doing this does not alter the money supply, as it is simply swapping one asset for another. However, the US Treasury has limitations, and the current buyback size of $6 billion per operation is too small to overcome the tailwinds driving price inflation and, hence, higher interest rates. The initial $2 billion offer to buy long-dated securities received 7 times the offering. That is also why Bessent had to ramp up the earlier announced $2 billion to $6 billion.

Now Bessent will soon realize that even $6 billion is too low to meet the stated objectives and that he would have to spend in the tens of billions of dollars, if not hundreds. Even the US Treasury doesn’t have that kind of money, and soon the US Fed would have to step in to take charge. But even the Fed doesn’t have that kind of money lying around. However, it does control the proverbial printing press, which it can use to conjure trillions of dollars out of thin air. Armed with the inexhaustible quiver, the Fed can indulge in Operation Twist, i.e., sell dollars to buy long-dated Treasuries, till the chickens come home to roost. But can they?

What happens when the US Fed steps in after the US Treasury fails? With the 10-year at 5%+ (indicating decreasing confidence about the US government’s finances in investors’ minds) and even the self-appraised price inflation at 2%+, there is no way for the Fed to reduce the fed funds rate. Warsh risks a massive credibility crisis, and hence needs to get the 10-year under 5% before he can even contemplate cutting rates under one pretext or another.

The problem with the Fed doing it is that “Operation Twist IS Monetary Inflation” and would lead to even greater price inflation. Therefore, pushing down long-term interest rates through Operation Twist would lead them to an environment where they have to hike the Fed Funds rate. Caught between Scylla and Charybdis? Not quite. In Greek mythology, a proverbial middle ground offered safe navigation; for the US Fed, there isn’t one.

The US Housing Bubble 2.0

The affordability index, even before the recent increase in 10-year Treasury yields, was already below the lows seen before the GFC in 2008, when it was at 70. A reading below 100 indicates that US housing is unaffordable for the median household and that housing prices have to decline for affordability to return (assuming other factors such as interest rates, incomes, taxes, and insurance stay unchanged). The July reading, when the 10-year Treasury was between 4.6 and 4.8%, was 68 and near its all-time low of 66. When the 10-year Treasury rose by nearly 50 bps, as it has in the last few weeks, housing mortgage rates have to at least match the increase in Treasury yields, if not widen the spread.

While multiple factors affect the housing affordability index, interest rates are the single most important driver. The HAI will almost certainly fall well below 65 when the September numbers are released. With no respite expected on the rate front, how long can housing prices stay at these elevated levels? The current House Bubble 2.0 will have to burst for affordability to return. After the 2008 GFC, the saving grace, if we want to call it that, was that the Fed dropped rates to zero and held them there for nearly 15 years. No such relief can be forthcoming this time around, and the Fed might even be forced to hike rates in the face of a collapsing housing bubble.

So how low can the median housing prices fall after HB2.0 bursts? After the 2008 GFC, prices fell about 40% over the subsequent 4 years. Now we have a much bigger housing bubble, and with little to no help from falling interest rates, we can expect prices to crash by at least 40%, if not much more.

The AI or NASDAQ 2.0 bubble

Of all the bubbles, the most ludicrous one is the AI Bubble.

The poster boy for the AI bubble has to be SpaceX, whose mission, amongst other things, is to “extend the light of consciousness to the stars”. Not content with taking consciousness to the stars, SpaceX plans “to establish a self-sustaining city of over a million people on Mars”. Elon Musk was plainly mocking investors, and yet (or “is it on account of?”) the issue was oversubscribed 4 times.

With overall debt issuance in the AI space exceeding $500 billion (a much higher number in the trillions according to Michael Burry) in 2026 alone, the scale of borrowings dwarfs anything we have seen in the industry. A rise in the 10-year Treasury yield would directly raise borrowing costs and limit borrowing, as bond investors recognize that plunging valuations are here to stay. Thus, a rising-rate environment would ensure that expansion of AI infrastructure build-out faces a massive credit squeeze.

While HB2.0 would collapse because elevated housing prices have made it unaffordable, the AI bubble would collapse as the external debt funding it would dry up. There is very little cash flow that the AI industry can generate to sustain itself.

The US dollar endgame

The US economy has been jumping from one bubble to another since the start of this century. What this has done is divert the attention of investors to the ever-growing twin deficits – annual trillion-dollar trade deficits and multi-trillion-dollar federal budget deficits. The attractiveness of investing in bubbles today has lulled analysts into ignoring the fundamental problems ailing the US economy.

When pointed out, the answer has always been that these are long-term problems and that one more shot at the betting roulette today is not worth forsaking. Unfortunately for the US, that long-term is NOW. The US economy today is built around cheap credit, importing Chinese goods based on their currency strength, and services built around those imported goods. It’s a daisy chain, and the rising Treasury yields will break the most critical link – the artificial strength of the US dollar.

The previous crisis, GFC 2008, did not lead to a significant devaluation of the dollar, and the DXY actually strengthened afterward. Today, the reality is fundamentally the opposite. A financial crisis today would eventually cause the DXY to collapse, not strengthen as it did after 2008. Or in other words, the margin call is going to be on the dollar, and as Jeremy Irons would put it, “THIS IS IT”.

Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

For all the latest updates, download PGurus App.