RESOLVING THE LEDGER
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CNBC's Jim Cramer said Monday investors can't ignore the bond market as stubborn inflation and surging corporate borrowing are keeping long-term rates elevated and pressuring stocks.
"Normally, I don't like to talk about bonds, because you don't want to hear about bonds," the " Mad Money " host said. "Unfortunately, it's very important now that long-term interest rates are on the rise."
The 10-year Treasury yield has climbed from below 4% in February to nearly 4.7%, while the 30-year Treasury yield recently topped 5.3%, its highest level in nearly two decades. Concerns intensified earlier this month when a 30-year Treasury auction drew weaker demand than the prior month, despite elevated yields.
Higher rates can hurt the stock market in a couple of ways, including offering tougher competition for investors' money and reducing the present value of future profits. That pressure has increasingly shown up in the market, with the S&P 500 falling in five of the past seven sessions.
The Treasury Department responded Wednesday by announcing it would more than double the size of its planned buybacks of longer-dated government debt. Yields initially fell and stocks rallied, but the relief proved short-lived, with rates climbing again Thursday and Friday.
Cramer said Treasury has limited ability to solve the underlying problem, particularly with the national debt now at $40 trillion.
"The only real solution to this problem is to either cut spending or raise more revenue and the Treasury can't do either of those things on its own," he said.
The underlying issues, according to Cramer, are elevated oil prices and a surge in corporate debt issuance tied to the artificial intelligence buildout.
Oil prices have soared amid the war with Iran, fueling inflation and making it harder for the Federal Reserve to lower short-term interest rates, he said. At the same time, technology companies are borrowing heavily to fund data centers, Cramer noted, forcing Treasurys to compete with a growing supply of corporate bonds for investor dollars.
"As more incremental dollars go to shares or bonds from a hyperscaler, Treasury yields have to creep higher in order to stay competitive," Cramer said.
Ultimately, Cramer said bringing long-term rates meaningfully lower will require easing the inflationary pressures that helped push them up in the first place.
"We want long-term interest rates to go lower, but that's only gonna happen if we can get inflation under control by reopening the Strait of Hormuz, and that's a tall order," Cramer said. "The Treasury Department's attempts to get this under control I think have only made investors more nervous."
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