"You are going to see a crack in the bond market. Our fiscal situation is a 350-lb two-pack-a-day smoker on the ICU table. The US federal budget is on an unsustainable path. I’m telling you it’s going to happen and you’re going to panic."

- Jamie Dimon, JPMorgan CEO

For the first time since the Great Financial Crisis, bond yields have just settled above 5%. The 30-year Treasury yield hit its highest level since 2007 (~5.18%) amid growing inflation worries. The chart shows how yields have been declining since the 1980’s, but bottomed early in the Covid pandemic, before turning higher.

Mortgage rates are climbing, the stock market has begun to correct over the past week, and fears of Fed rate hikes are growing, as swaps now signal an over-80% chance of a rate hike by the end of 2026. Fear has begun to grip the markets this week as concerns about a bond market implosion surface.

For the past few decades, our entire economy has been built on cheap money. Homes got more expensive because people could borrow more. Stocks went higher because there was nowhere else to put your money. But now the entire system could be showing early signs of reversal. Stocks have reached overvalued levels and face growing competition from bonds as yields rise.

In this article, I will discuss why bond prices are collapsing, yields are surging, and why 5% is the magic threshold that could break the economy. Most importantly, I will discuss how this could affect your investments and what you can do to protect yourself from this trend change.

Anytime the United States needs money, it issues Treasury bonds, and investors lend money with the promise of being repaid at a fixed, consistent interest rate. At the end of the term, investors receive their original investment back.

Treasury bonds are seen as essentially risk-free and traditionally pay a low return. Investors, pension funds, endowments, banks, and other institutions buy Treasury bonds as a safe place to store their money, since the government is unlikely to default on its debt. Except, in this case, bond prices are starting to collapse.

Bond prices and bond yields move in opposite directions. So, when investors want to buy bonds, bond prices go up, and yields go down. But when investors sell bonds, bond prices fall, and yields rise. That's why anytime you see a headline that says, 'Yields are spiking,' this means that people are selling off government debt and demanding a higher return to lend their money.

This is a warning sign.

If the safest borrower in the world (the US government) suddenly has to pay more, then everything else in the economy has to adjust to that new number. And once investors can earn a risk-free 5% return, capital begins to flow from other assets, such as stocks or real estate, into bonds. When large amounts of capital flee these other assets, prices start to drop rapidly.

Higher yields can be good for investors, but not so great for borrowers, such as the United States. When yields rise, it becomes more expensive to service the national debt. The US government must refinance at higher rates, leading to increased borrowing and higher interest expenses. Higher interest adds to the primary deficit → more debt issuance → even higher future interest. This is the classic debt spiral risk when interest rates exceed economic growth.

The US rolls over trillions in maturing debt each year. New bonds issued at higher rates lock in elevated costs for years (especially longer-duration Treasuries). A large portion of the debt has already been, or will soon be, refinanced at higher post-2022 rates.

The US government has $39 trillion in debt currently and faces significantly higher borrowing costs. This creates a feedback loop that strains the budget, crowds out other spending, and raises long-term risks.

In fact, interest costs alone are expected to exceed $1 trillion this year, making them the largest budget item after defense spending.

The CBO projects that net interest will rise to $2.1 trillion by 2036 (4.6% of GDP), consuming ~25% of federal revenues.

This reduces flexibility for discretionary programs (defense, infrastructure, education, R&D), increases inflationary risks, and reduces confidence in the government.

The US has handled high debt-to-GDP before (post-WWII ~106%), but that was with much lower rates and stronger post-war growth. Today’s combination of high absolute debt + elevated rates is more challenging. Strong US growth, dollar dominance, and investor demand for Treasuries have kept rates manageable so far. But risks grow nonlinearly, especially in an era of increasing de-dollarization and trade wars.

There are three specific forces all about to hit the market at the exact same time:

1) Inflation. In this case, last week CPI jumped 3.8% year-over-year, the highest reading since May of 2023. And PPI... rose 6% year-over-year, the fastest pace since 2022...

2) Oil. In this case, the conflict across the Middle East caused oil prices to spike above $100 per barrel. Higher oil effects more than just gas prices. It literally flows throughout the entire economy. When oil spikes this much, inflation eventually follows.

3) The government is flooding the market with debt. The fact is, we are running roughly $2 trillion in annual deficits. Foreign buyers like Japan have less incentive to buy US Treasuries. Historically, 5% has acted as a ceiling.

Speaking of Japan, its bond market (JGBs) is undergoing a significant normalization after decades of ultra-loose policy. Yields have risen sharply since 2024–2025 as the Bank of Japan (BOJ) exits negative rates, ends Yield Curve Control (YCC), and tapers bond purchases amid persistent inflation, wage growth, and fiscal expansion.

Japan’s bond market is sending a warning across global markets as long-dated government debt faces one of its sharpest selloffs in decades. The 30-year Japanese government bond (JGB) yield reached a record of around 4.2% on May 18, while the 10-year yield climbed to 2.8%, its highest level since 1996!

Japan's shift in bond markets has meaningful global spillovers, especially to the US, given Japan's status as the largest foreign holder of US Treasuries (~$1 trillion). This translates into reduced demand for US Treasuries and an unwinding of the Yen carry trade, which has propped up US stock and bond markets. This exacerbates US debt dynamics in a high-rate environment, making the aforementioned problems significantly worse.

So, what can investors expect from these recent developments in the bond markets?

1) Lower prices for stocks. Higher yields make "risk-free" bonds more attractive, pulling money out of stocks. They also raise corporate borrowing costs, hurting profits, valuations (via higher discount rates on future earnings), and growth stocks especially. Value stocks or sectors less sensitive to rates (e.g., energy, financials) may hold up better.

2) Other bonds/fixed income could be directly hit hardest. Longer-duration bonds (e.g., 10-30 year Treasuries) suffer the biggest price drops. Corporate bonds, especially lower-rated ones, may widen spreads due to higher risk aversion.

3) Short-term bonds or floating-rate securities fare better. High-yield bonds can sometimes outperform investment-grade ones in rising-rate environments if the economy stays resilient.

4) Real Estate prices could face pressure as mortgage rates rise, reducing affordability.

5) Gold and Precious Metals often act as a hedge long-term but volatile short-term: Gold can dip initially due to liquidity needs and rising real yields (which increase the opportunity cost of holding non-yielding assets). However, it often recovers first and with force, especially if the crash signals inflation, currency weakness, or economic uncertainty. Historical crashes show gold performing well as a safe haven during periods of equity/bond stress.

6) Oil would normally come under pressure with yields rising. But with ongoing tensions in the Middle East and the closure of the Strait of Hormuz, prices could remain higher for longer than most investors expect.

7) Bitcoin typically has a high correlation with equities and thus risks getting dragged down with stocks. But we have seen periods of divergence, with Bitcoin trading more like a safe-haven asset when capital flees risk assets. If the bond crash signals deeper US debt/fiscal issues, the inflation/debasement-as-a-hedge narrative strengthens. Persistent high deficits and potential Fed intervention could weaken the dollar and boost Bitcoin’s “digital gold” appeal.

Should investors buy Treasury bonds with rising yields?

If you're looking for a safe, stable, long-term return without trying to chase stock market returns... then yes, buying Treasuries right now as part of your overall portfolio allocation might make sense. I use the iShares 0-3 Month Treasury Bond ETF (SGOV) for exposure to Treasuries.

But the forward yield is currently only 3.5%, and the trailing 12-month yield is 3.9%. This isn’t going to beat official inflation statistics, let alone real-world inflation numbers.

Instead, I have been utilizing the Strategy Inc 9.0% SERIES A PERPETUAL STRETCH PREF STK (STRC), which is currently yielding around 11.7%. It targets trading near a $100 par value with low price volatility, but comes with additional risk. It is a Bitcoin-backed credit issued by Strategy, the world's largest corporate holder of Bitcoin. STRC dividends are funded largely by ongoing capital raises (e.g., selling additional securities) and appreciation of Bitcoin collateral, rather than stable operating cash flows. The dividends are perpetual, with no maturity date or principal repayment guarantee, and are cumulative but not guaranteed.

So, the fund is not for everyone, especially those with very low risk tolerance. But for investors who are bullish on Bitcoin and want steady monthly income at roughly 3x what Treasuries pay, with some additional risk, this is a good option to consider. It can work well in a Bitcoin bull market or stable environment, but carries real downside if BTC corrects sharply or funding dries up. It's more like a hybrid crypto-income product than a safe fixed-income alternative.

Investors might also consider hedging against rising interest rates with a fund like the Simplify Interest Rate Hedge ETF (PFIX). This is an actively managed fund designed to profit from rising long-term US interest rates and increased volatility in fixed income. It is split between interest rate derivatives and high-quality fixed income, offering a 9.3% yield (TTM).

The chart below shows how strongly PFIX performed during the 2022 bond crash while stocks and bonds suffered. The price nearly doubled, while stocks and bonds faced double-digit declines.

I view PFIX as a convex hedge. Unlike simple inverse ETFs (e.g., TMV), it offers "black swan" style convexity — big upside in sharp rate/volatility spikes with more limited (but still present) downside in calm markets. It performed extremely well in 2022 (up ~90%+ while bonds and stocks crashed). PFIX is up 16% in the past month and 7% in the past week alone, while stocks have declined.

There are risks to consider, such as time decay, high volatility, derivatives complexity, and the opportunity cost if stocks/bonds continue higher. I think it is best used as a tactical hedge, not going “all in” or as a core holding.

Here is a summary of some practical steps that investors can consider to hedge against the potential of major turbulence in the bond markets:

The bond market is sending a very clear message... interest rates can stay higher for longer. This could have severe ramifications across all asset classes and spiral out of control faster than most investors anticipate. Taking some common-sense steps to reduce risk and hedge your portfolio ahead of any acceleration in the collapse of the bond market seems prudent at this point.

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