BofA Morning Market Tidbits: Are yields normalising? Or should we be concerned? How about both

Key takeaways Long-end yields have "normalised" to pre-GFC levels. The problem is, net interest expenses are at a record high. History suggests yields might have to rise much more before Washington is incentivised to pursue fiscal consolidation. Today's events: weekly ADP, comments by Williams, Jefferson and Barkin. Context matters Some analysts have argued that we shouldn't worry about the surge in long-end yields because i) it is just a normalisation to pre-GFC levels, and ii) it has been driven by real yields, suggesting markets have upped their long-term growth expectations. We are somewhat sympathetic to this reasoning. But our concern is that yields are spiking alongside the federal government's net interest expenses, which reached a record high of 3.3% of GDP in 2Q 2026 (data available since 1984). Still some ways from the pain point When the 10y yield was at 5% in 2007, interest expenses were just 1.7% of GDP. At the previous peak of interest expenses (3.2% of GDP in 1991), the 10y yield was around 7%. Soon after, Congress passed the OBRA, which led to an extended period of fiscal consolidation that culminated in a surplus in the late 90s /early 00s. Therefore, it's possibl