PodcastDavid Lin ReportBen Chabot

Yields At 5.3%; Is Another 2008 Banking Crisis Next? | Ben Chabot

Chabot argues that long-term yields reflect investor demand and that a shift to much higher borrowing costs could create a self-reinforcing cycle of rising rates and debt. He sees SVB’s unhedged duration exposure as an outlier, while noting that stress-test design and bank capital figures have important limitations. Market signals on risk are mixed, and the speakers describe recent Treasury auction results as signs of weaker demand rather than failed auctions. Chabot expects the AI investment boom to keep adding long-duration borrowing and could keep yields elevated.

Interest RatesBankingGovernment Debt

Preview · 16 more points in the app

Read the Full Summary

Key Takeaways

Chabot says the Treasury cannot set long-term yields, which respond to investor demands; he attributes recent increases to a higher expected Fed policy path, a rising term premium, and added debt and AI-related borrowing. The 2025 buybacks were aimed at improving liquidity rather than removing duration, though replacing bonds with others of roughly the same maturity could slightly lower rates by improving intermediaries’ balance-sheet capacity.

Chabot expects yields to stay high and rise further while the AI investment boom adds long-duration debt, potentially requiring higher returns if pension funds and insurers cannot absorb the supply. He also says high yields could make some AI investments less attractive, while AI agents could intensify competition for deposits and push banks to raise deposit rates.

Chabot says SVB chose not to hedge its interest-rate exposure and suffered large losses when rates rose; he agrees that a recession stress scenario with rising rates could have exposed the bank’s vulnerability as early as Q4 2021, unlike earlier scenarios that generally assumed falling yields. He describes SVB as an outlier among banks that generally hedge, while warning that steep yield-curve inversions can also compress bank spreads.

ECONOMY

Treasury Yield Limits — Chabot argues that the Treasury cannot set long-term yields, which depend on the rates investors are willing to accept. Deficit reduction could influence yields, but small buybacks and market commentary have limited effect.

“The Treasury. Yes, in general that's right. I mean the Treasury doesn't get to pick the rate at the long end of the curve. markets have to clear…”—

Yield Curve Control — Chabot says yield curve control during and immediately after World War II used Fed bond purchases to cap long-term yields. He argues that adopting the policy today would cause large inflation, and says an independent central bank focused on inflation is important to controlling long yields.

“We had yield curve control in the past during World War II and immediately after we abandoned it with the Fed Treasury Accord in 1951…”—

Debt-Yield Feedback — Chabot says 5% is not a fundamental threshold for bond yields, but could become a focal point that changes investor behavior. If investors expect others to demand higher rates, borrowing costs can rise, widening deficits and potentially creating a self-reinforcing cycle of high rates and rising debt. He says U.S. debt could remain sustainable with borrowing costs of 2% or 3%, but a shift to 7% or 8% could quickly make interest costs unsustainable.

“in a lot of these models of bond prices there there's fundamentals like how much duration has to be held by the market expectation of the future policy paths but…”—

MARKETS

Global Yield Rise — Scott Bessent describes the rise in yields as global, not an idiosyncratic Treasury selloff. He says U.S. bond performance since the president took office had been the best in the world and that investors were not selling Treasuries to buy German or Japanese bonds.

“It's been a global rise. The US market, US bond performance since president come in came in has been the best in the world…”—

Treasury Buybacks — Chabot says the 2025 Treasury buyback program was presented as a way to improve liquidity, not to remove duration or change the debt’s weighted-average maturity. Replacing off-the-run bonds with on-the-run bonds of roughly the same maturity could slightly lower rates by improving intermediaries’ balance-sheet capacity.

“Prior to this recent announcement, we've had buybacks before. We've actually doubled the buyback program before. We did it in 2025 and Treasury was quite explicit…”—

Conflicting Risk Signals — Chabot says historically cheap out-of-the-money stock-market puts suggest investors are not very worried about a tail event, while the elevated and rising term premium on long-term bonds points to greater uncertainty about those bonds. He says the assessment of financial stability depends on which market signal is considered.

“If you look at VIX for instance, I mean the obvious example is something like you can buy in tail insurance on the stock market by buying out of the…”—

FORECASTS

AI and High Yields — Chabot expects yields to stay high and keep rising as long as the AI investment boom continues, because AI-related borrowing adds long-duration debt that investors must hold. He says natural buyers such as pension funds and insurers could be exhausted, requiring higher returns to attract other investors.

“The key is my expectation is yields will stay at high levels and even trend up as long as the AI boom continues. There's a lot of borrowing there…”—

Intro.

The speakers argue that Treasury cannot set long-term yields directly because markets must clear, though deficit reduction and liquidity-focused buybacks may modestly affect borrowing costs.

Can Treasury Control Bond Yields?

They explain that a rapid unwinding of yen carry trades could force Japanese holders to sell Treasuries, adding duration supply and potentially pushing yields higher.

Yen Carry Trade & Treasury Risk

Chabot describes financial-stability signals as mixed: bank and equity-market indicators look relatively calm, while elevated term premiums suggest greater concern about long-term bond risk.

How Stable Is the Financial System?

Chabot says conventional recession scenarios with falling rates could have missed SVB’s vulnerabilities, while inflation and rising-rate scenarios might have exposed its concentrated duration risk.

Could Stress Tests Have Flagged SVB?

He attributes SVB’s failure to an unusually large, unhedged bet on low interest rates, contrasting it with banks that generally hedge duration and can benefit from rising rates.

Why Silicon Valley Bank Failed

Chabot sees trade-offs in making Fed stress-test models more transparent: outside scrutiny could improve them, but common model errors and slower regulatory updates could create new risks.

How Fed Stress Tests Are Changing

The speakers distinguish a literal failed auction from weaker Treasury demand, explaining that auctions can clear at higher yields and that recent tails reflect shifting investor appetite.

Could There Be a Bond Market Run?

Chabot explains how confidence can become self-fulfilling in sovereign bond markets, potentially creating high-rate, high-debt equilibria, though he says the United States is not necessarily at that point.

Why Yields Could Keep Rising

Chabot expects AI-related borrowing to add long-duration debt and keep yields elevated, as investors beyond natural long-term buyers may need higher returns to absorb the supply.

Related Episodes

Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

Our Commentary · Request Removal