What is market sentiment worth? Market sentiment is captured in the expression “term premium.” Term premium is the compensation that investors require to bear the risk that interest rates may change over the life of the bond. There are two factors that drive market sentiment, among others: United States debt levels and fear of inflation.
We live in interesting times, but in fact life is just interesting. We once asked a New York Times financial writer how he evaluated the causes of market shifts. He said he has ten factors and chooses among them to write his articles. Then he asked: “How would you do it?”
For the first half of Feb 2025, interest rates measured by the Fed 10-year and 30-year benchmarks stayed about the same.
However, between 2/12/25 and 3/03 the interest rates on both benchmarks declined as follows:
| 10-year Treas | 30-year Treasurys | |
| 2/12/2025 | 4.62% | 4.83% |
| 3/3/2025 | 4.18% | 4.48% |
The interest rates on Muni bonds moved down as well, but not as much as the Treasury. Current yield on March 3rd, on the 30-year triple-A index is a 4.08.
We were still able to get handsome yields on the high-quality muni bonds that we purchased for clients.
With respect to tax-free housing bonds, the long-term rates were 4.6% and 4.7%, now moving to 4.5%
Interest rates are declining in the face of threatened tariffs supposedly soon to take effect. Wouldn’t you expect the opposite?
In addition, there is a drumbeat among financial analysts that the US must reduce its debt. Ray Dalio, the billionaire founder of hedge-fund giant Bridgewater Associates, is warning that the U.S. could soon face a full-blown debt crisis if the Trump administration doesn’t take immediate steps to rein in deficit spending.
Naturally, such an event is impossible to predict with certainty. But if Dalio had to guess, he would say the inflection point could arrive within three years. Good guess for the crystal ball.
Of course, there is a method to his madness. Dalio is publishing a new book, How Countries Go Broke, in which he explains how long-term debt cycles work, and the risks that could arise from failing to engineer a de-leveraging of the U.S. federal government.
We look forward to reading it. Let us know your thoughts.