Over the last four months, the Federal Reserve has cut interest rates by a full percentage point. It started with a supersize 50 basis point cut in September, followed by quarter-point cuts in November and December. But despite slashing rates, Treasury bond yields have risen sharply.What’s going on in the bond market? Why are we seeing this disconnect between monetary policy and the long end of the yield curve? Financial analyst and bond guru Jim Grant talked about this incongruous trend on CNBC. He said he thinks decades of monetary malfeasance coupled with out-of-control government borrowing and spending have finally caught up with us.

“The market thinks the Fed might have overdone it. And the market can’t help but notice that none of the personages who ought to be talking about the public credit, debt, deficits have mentioned those words, let alone deplored the trends of debt and deficits.” 

What does Grant mean by “overdone it?”He’s referring to the aggressive rate cuts despite sticky price inflation created by decades of easy money. Grant thinks at some level, the markets understand the inflation dragon isn’t dead and investors are demanding a higher rate of return to cover that potential inflation risk.And on the fiscal side of the coin, the world is growing increasingly concerned about the debt situation in the U.S. Despite a ballooning national debt eclipsing $36 trillion, the federal government continues to spend excessively more than it takes in, running massive deficits month after month.  Gold Newsletter editor Brien Lundin told MarketWatch
 that dollar strength, rising Treasury yields, and the surging price of gold are all evidence of this global concern about the U.S. fiscal situation. 

“The ‘bond vigilantes’ are demanding higher returns in light of the risk that Treasurys represent, with the U.S. debt and deficits at such elevated levels relative to GDP.”

Grant emphasized that these two factors are weighing on the bond market and causing yields to rise.

“I think the combination of a perhaps overly accommodative Fed and the aforementioned public credit issues … are weighing on the [bond] market.”

Lundin made a similar observation.

“The dizzying rise in the 10-year Treasury yield began with the [Federal Reserve’s] rate cuts, and that’s not coincidental. The fact that the Fed may be losing some control over rates is, in itself, concerning and is also adding fuel to the rise in yields.” 

Grant said this problem has been in the making for decades. Artificially suppressed interest rates allowed everybody to sweep the government spending and debt problems under the rug.

“One of the great ways not to get rich for the past 30 or 40 years has been to have concerns about the public debt.” 

Grant pointed out that under Reagan, interest rates were sawed in half as the debt nearly doubled. This kicked off a bull market in bonds, with yields falling for 40 years between 1991 and 2021.That had consequences.

“I think the world has been out of practice at critically examining America’s public credit and the weight of American debt.”

Grant has observed that bull and bear cycles in the bond market tend to be generational. He pointed out that the bear market in bonds preceding the most recent 40-year bull market lasted for 35 years.

“Nothing says the past must be prologue, but if it were, we’re looking at the start of what could be a generation-length bear bond market.” 

And the downward spiral in bonds could be significant, meaning a substantial rise in bond yields. “Common sense would tend to support this proposition that great excesses characterize great bull market tops and great bear market bottoms,” Grant said.This is bad news for a government that depends on low borrowing costs to sustain its borrow-and-spend habits, and it spotlights the Catch-22 facing the Federal Reserve. It needs to keep driving rates down due to the massive level of debt (And it’s not just government debt. Corporations and consumers are levered to the hilt as well.), but it also needs to keep rates higher to keep inflation at bay.It can’t do both. Grant cautioned that his projection of a generational bear market in bonds is “conjecture based upon historical observation” and that things don’t have to play out that way. But…

“If it were to do it, one might look back at the end of it and say, ‘Aha! The reasons were the final come-upins with the American debt, with the abuse of the so-called reserve currency privilege, with perhaps the end of what we at Grants call the Ph.D. standard, which is the improvisational management of monetary policy through mathematical models that don’t always yield sound results.”

Some people claim that we don’t need to worry about borrowing and money printing because the U.S. issues the reserve currency. In essence, it’s like a credit card with no limit. But Grant cautions that the benefits of reserve currency privilege have their limits.

“It’s like an affluent parent with a somewhat underachieving child. ‘Here’s $20 million. Go out and drink yourself to death.’ That is, in a way, like the reserve currency privilege. It is an invitation to consume more than you should.” 

As far as inflation, Grant doesn’t think it’s dead and buried. In fact, he expects more rounds of price inflation.

“To me, inflation resembles one of these underground coal fires in West Virginia that’s always latent and not always manifest. It’s under the surface. You feel it in the soles of your shoes, but it doesn’t always flare to the surface. But I think certainly, the makings of a manifest and obvious inflation are there.”

One might expect rising yields to create headwinds for gold, but so far, that hasn’t been the case. Gold has been surprisingly resilient despite the surging dollar and bond yields. The ongoing inflation problem and the elevated levels of risk due to the federal government’s fiscal irresponsibility are bullish for gold. The yellow metal will also likely benefit from the ongoing global diversification away from the dollar. We saw this play out last year as central bank gold buying supported the market even with interest rates at relatively high levels.More By This Author:Recession Watch: Are Americans Close to Hitting Their Credit Card Limits?Global ETF Gold Holdings Increase In December For The First Time Since 2019 I Hereby Resolve… Gold And Silver In 2025