Bond selloff lifts the discount rate under long-dated valuations to 5.145%

Discount a dollar that arrives every year forever at 5.145% and it is worth about 19.4 dollars today ^[1][17]. That figure comes before an underwriter adds any spread for credit risk or illiquidity. Every long-dated price quoted as a spread over the 10-year sits on top of it.

Whether that base holds depends on what is pushing it up. On energy, this week's evidence points to persistence. JP Morgan's chief economist predicted that the surge in energy prices sparked by the US-Iran war would persist, with supply bottlenecks and rising commodity prices adding to inflation, Semafor reported ^[9]. Oil moved back above $105 a barrel on Thursday ^[10]. Iran's President Pezeshkian said Iran would not allow freedom of navigation through Hormuz while the US blockade and sanctions remained in place, according to Reuters ^[11].

Energy is one pressure among several. "Inflation is high, central bankers are giving hawkish messages, there's competition from the funding needs of the tech sector and there are no reassuring signs on the US debt trajectory," Gilles Moec, AXA's chief economist, said ^[12]. Two of those four items concern how much debt is coming to market, and neither moves with the price of a barrel. A weak US government bond sale, along with strong PMI data, compounded Wednesday's rout ^[6]. Moec put the Middle East on top of all that as "the binary geopolitical issue" ^[13].

A truce that reopens Hormuz would pull oil down and take the energy premium out of the inflation bet. A growth scare could send buyers back into Treasuries with inflation still high. Or the supply pressures Moec listed keep long yields up after the oil premium fades. I'd expect the third, and if it holds, cheap long-term money stays scarce after the war as well as during it. The counter-thesis is that the selloff is mostly an oil trade. It has a clean test: a 10-year back well below 5% within weeks of a truce would show that energy carried most of the move, and underwriters could price for cheaper money again.

Governments borrow off the same benchmark. Global debt topped $365 trillion, roughly three times GDP, CNBC reported, and Semafor cited warnings that governments were caught in a "vicious cycle" of short-term fixes and long-term vulnerability ^[14]. On the $29 trillion Treasury market alone, each percentage point of yield comes to $290 billion a year of extra interest once the whole stock has rolled over at the higher rate ^[1][16].