⚡️Market Strategy Flash
July 24, 2026
When Treasury yields rise, investors tend to make the same diagnosis:Debt. Deficits. Inflation. Vigilantes.It’s the financial equivalent of blaming strange noises coming from under your car’s hood on a blown transmission. Sometimes it’s true. Most of the time, however, it isn’t. What if the bond market’s saying something less dramatic?
Positive “Carry” Trade
One of my favorite charts in our2026 Mid-Year Macro Outlookcompares nominal gross domestic product (GDP) growth with the 10-year Treasury yield. That “oldie” but “goodie” relationship illustrates the “carry” trade or net return you make simply by holding an asset for the long run, despite its near-term price fluctuations. Think of it as the income that an asset generates while sitting in your portfolio, minus the ongoing costs to finance, insure and / or store it. Essentially, being paid to wait is the foundational concept beneath the developed world and our entire financial system.
In 1Q26, the US economy – including prices and volumes – expanded by6.1%year-over-year (Y/Y), while the 10-year Treasury yields4.7%today. That’s not restrictive, it’s accommodative. In other words, the economy’s earning at least 1.4 percentage points (ppts) more than it costs to finance itself, thereby supporting the ongoing mid-cycle expansion (see the chart below).
Paid to wait: The economy’s earning 1.4+ ppts more than it costs to finance itself
Sources:FRED, WCG, 07/23/26.Notes:NBER = National Bureau of Economic Research.
When to Worry
History suggests that our growth engine usually stalls when the cost of money overtakes the economy’s ability to generate income. Fortunately, however, our fuel gauge indicates we’re currently running on a full tank of gas.
Why all the anxiety? Because investors routinely confuse higher yields with tighter policy when they’re not the same thing. Much of this year’s climb in medium- to long-term Treasury yields hasn’t been driven by expectations for runaway inflation or a panicking Federal Reserve (Fed). Rather, the bond yield backup has been driven by something far less sinister: A higher “term premium” or the extra compensation investors demand for lending money over longer time horizons. That isn’t a red light, it’s simply the price of “interest-rate risk” returning to normal.
Market Metaphor:If your automotive insurance premium went up because you bought a faster car, that’s different than your premium rising because you started driving blindfolded. While both scenarios would likely cost more, only the latter would guarantee a crash.
The same logic applies to bonds. Higher Treasury yields – propelled by stronger growth, heavier supply and normalizing “interest-rate risk” – tell a completely different story than yields ignited by a spiraling “inflation scare:”
- One reflects rational decision-making.
- The other reflects fear.
From my lens, today’s bond market looks more like the former.
Why It Matters
Too many investors are still trading as if bonds are trapped in the zero interest rate, negative real yield purgatory of the post-pandemic era when they aren’t. For the first time in years, fixed income finally offers something wonderfully old-fashioned:Income.
Moreover, bonds can potentially provide diversification again if economic growth settles into a “non-inflationary equilibrium,” as we expect. Specifically, 2% real GDP growth, cool “core” inflation, and a Fed that’s disciplined enough to avoid creating problems that don’t yet exist.
Admittedly, it isn’t an exhilarating forecast. But markets and investing don’t reward excitement, they reward correctly identifying what the crowd’s getting wrong. In my view, one of the biggest misconceptions right now isn’t that Treasury yields are too high or low. It's the knee-jerk reaction that every rise in yields is automatically bad news. Sometimes, a higher interest rate isn’t a police siren. Sometimes, it’s just the market reminding us that a healthy economy should pay investors a reasonable rate for lending it money.
If you like what you see and want more striking visuals, please check out our 2026 Mid-Year Macro Outlook entitled, “Dynamic Optimism in a Non-Inflationary Equilibrium,” or reach out to your WCG financial advisor for a copy.
Definitions
TheNational Bureau of Economic Research (NBER)defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Recessions are the periods between peaks and troughs of the business cycle.
10-year US Treasury note:A government debt security issued by the US Department of the Treasury that pays the holder a fixed interest rate every six months and matures in 10 years, at which time the principal amount is returned to the investor.
GDP:The value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.
Fed:The central banking system of the United States. It regulates commercial banks, manages the nation’s money supply, and sets monetary policy to promote maximum employment and stable prices.
Interest rate risk:The danger that a change in market interest rates will reduce the value of a fixed-income investment like a bond. When interest rates rise, bond prices fall, causing losses for investors who sell before maturity.
Term premium:The extra compensation or higher yield that investors demand for holding a long-term bond instead of a series of short-term bonds. That added return protects investors against the increased uncertainty and price volatility of locking their money up over time.
Disclosures
The views expressed are for informational and educational purposes only and are subject to change without notice.
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Publication Date: July 24, 2026
For Public Use in the US
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