Bond Investors Are Panicking. They May Be Right.

Rate spikes are painful because they're supposed to be. They are kind of the economy's way of destroying excess, repricing risk, and reminding everyone that capital actually has a cost. It's basically the ruler wrapping on the knuckles of the Trump administration's reckless economic policy and waking people up from this fever dream that AI is going to create 10 different Microsofts in the next 24 months. It's the alarm clock going off saying, 'No, your dreams are over, my friend.' It's the cold shower that we've all been needing to take for a while.

Today's number: 15. That's the percentage of Americans who say they'd be willing to have a job where their direct supervisor was an AI program. Ed, true story. My first boss died an untimely death and I went to his funeral with an open casket and I leaned over and said, 'Who's thinking outside the box now, Randy?' How are you, Ed?

I'm doing well. Doing well. Very excited for our show happening in two days. We're heading to San Francisco to kick off the Prof G Markets tour with a fully sold-out show. I can't wait to go live for the first time. Tickets are still available for LA this Thursday night. By the way, Netflix's co-CEO Ted Sarandos is joining us there to break down the future of media. He's going to tell us whether Hollywood is dying or if it isn't dying or how it isn't dying. I'm sure that'll be an interesting and spicy conversation. And then we've also got Miami, which tickets are still available for on Saturday night. And then on Chicago on June 1st, we are speaking with Governor JB Pritzker. It's happening. It's finally here. I can't wait. Um, this is our big moment. The moment's arrived.

And I just found out that literally, I'm not exaggerating, like when people ask me who my role model and hero is, I mentioned this person and I found out literally 30 minutes ago that this person is a fan of the show and is going to come to one of the shows and be an onstage guest. And I'm not allowed to say for security reasons, but this person is going to show up to one of our shows. So, I'm just super excited.

We're not going to reveal who it is and we're also not going to reveal which city that individual is going to arrive at. But all you do need to know is the thing that Scott just said, which is that if we were to reveal it, it would be a problem for security reasons. I mean, boom, you got to buy a ticket.

There you go. Uh, which city are you most excited about, Ed?

You know, I was LA. But I'm increasingly excited to end the tour in New York with the Mooch and just sort of celebrate in our hometown. By the way, the Knicks are going to be playing as well. Uh, Knicks are in the conference finals. There's just a very positive, exciting New York City energy going on right now and we're going to ring that bell live in New York at Town Hall. So, I was kind of excited about LA because LA feels sexy and cool in Hollywood. I still am, but I'm slowly kind of getting more excited about New York City. What about you?

I would say LA because a lot of my friends from college are coming and that's nice for me. So, that will be nice. Yeah, probably LA.

Very exciting. Well, if you want to get the tickets, head to profgmarkets.com. We can't wait to see you there. We'll see you very soon. Shall we get into the show, Scott?

Let's get into it.

Hey everyone, if you haven't already, please subscribe to our Prof G YouTube channel. And if you want to get notifications of all of our latest episodes, just click the bell icon as well. Inflation fears drove the yield on 30-year Treasuries to its highest level since 2007 last week. And the surge in yields weren't just an American story. 30-year bond yields in Canada, Germany, France, Spain, Portugal, the Netherlands, and Switzerland also hit 12-month highs. A big part of the spike is owed to war-driven inflation and the resulting probability that the Federal Reserve may need to hike interest rates sooner rather than later. On CME, the odds of a Fed rate hike before year end have climbed from around 15% a month ago to above 40% last week. So, it appears, Scott, that the bond market is finally reacting to inflation in a serious way. The 10-year yield hit almost 4.7%, its highest point since January of last year. As I said, the 30-year yield hit almost 5.2% on Tuesday, its highest level since July 2007. This is what HSBC is calling the quote 'danger zone,' meaning that yields have risen to levels where they will actually start to cause some stress in other parts of the market. This is why it's important for investors to be aware of what's happening in the bond markets. Meanwhile, Bank of America just published a survey. They found that 62% of fund manager respondents expect that 30-year Treasury yields will hit 6% this year. If we hit 6%, that would be the highest level since 1999. In other words, despite the relative calm that we've been kind of analyzing in the stock market and trying to understand, what we're now seeing is that bond investors are looking at inflation. They're looking at our prospects in the Middle East and Iran, what gas prices and oil prices will do to overall inflation in the rest of the economy, and they are as a result freaking out. That is what we're seeing with yields. Lots to get into here. What are your initial reactions?

Well, the term we used when this tariff nonsense went crazy and he backed away was that the bond market is the adult in the room, and that was last April with tariffs. And now it appears that the bond market is sort of, unfortunately, not unfortunately, fortunately, putting pressure on Trump's decisions. What that results in, though, is that every time I hear President Trump threatening the IRGC in Iran, it's so obvious he has no cards to play because he desperately wants out, but he can't get the terms he wants unless there's a credible threat that he's going to stay. It's literally the definition of a quagmire because right now the IRGC is supposedly rebuilding. They've survived. So their attitude is this guy is telling his party and the nation that this was supposed to be over four weeks ago. His popularity is plummeting. He desperately wants out, but he quote-unquote is threatening to do more. So the bond market has stepped in and said, 'Okay, with energy going up, we have greater inflation, which is pushing bond yields up and increases the odds that the Fed will raise rates.' Typically, when the bond market goes up, it draws money out of the equity market because people can get a better yield with what they feel is a safer investment, and also fewer deals get done because it gets more expensive to buy things. It gets more expensive. You know, everything in the economy, your auto loan, your mortgage, your credit card goes up, and the yield on the 10-year Treasury kind of sets the bar for interest rates across the economy, right? And higher yields also increase the cost of servicing our debt. In 2026, he also spent a trillion dollars on interest payments. That's 88 billion a month, roughly what we spend on defense and education combined. And Niall Ferguson has named this Ferguson's Law: any great power that spends more on debt service than defense starts to decline. And then the question is, could this trickle down to software and AI who've taken out private credit loans? Private credit loans are typically floating rate. So what happens when the AI shell companies that are built on debt, what happens when their debt service costs go up and then they hit a bump in the road where their capex continues to go up, but the revenues don't scale in line with their capex, which according to the FT and every other analysis I've read says it'll be nearly impossible for revenues to keep up with capex at AI companies. So you could have shavings of [__] on a [__] salad here, right? You could have costs go up, so consumers take their spending down, and then the companies that are most levered or who have been tapping the credit markets see their costs explode while maybe registering a decline in revenue growth that can't, you know, there's no way they can live up to their expectations. So, you know, we keep saying the deficit doesn't matter until it matters. It feels like that mattering may be starting.

Yeah. And it all goes back, I mean, I'm glad that you lay out some of the downstream effect or maybe we'd call it sort of the chain reaction that happens as a result of inflation because you know this relates to our conversation last week, which is that rising inflation has generally been almost ignored by equity investors. Investors don't seem to be that worried about the inflation and there are all these reasons and these arguments as to why inflation doesn't really matter and some of them are quite compelling. But you know when you kind of model this out over the long term and you think about what rising prices actually means for all of the other parts of the economy, we had inflation which rose to 3.8% last month. The PPI rose to 6%. Gas prices are up more than 50% year-over-year. Airline fares are up more than 20%. Etc., etc., etc. One of the main implications of these rising prices is that it probably means that we will have a rate hike from the Federal Reserve this year. And in fact, if we look at the odds on CME, the chances of a rate hike have risen to 40%. At the beginning of the year, those odds were less than 10%. You'll remember heading into the year, we thought we were going to have a rate cut. In fact, the odds of a rate cut on CME again at the beginning of the year were 96%. We just assumed that this was going to happen. And so, what happens when you do hike rates, which it increasingly seems that that's potentially going to happen here, or at least is a very real possibility getting closer to a probability? It means that you just have higher interest rates across the board. It means that consumers are spending more on their interest payments, on their mortgage payments, on their auto loan payments. And then, as you've mentioned, the cost of debt rises for companies too. Everyone has to pay higher borrowing costs. What might that do to earnings? What might that do to earnings expectations? What might that do to the AI buildout, which to your point is increasingly dependent on debt? We look back to October of last year, AI-related debt ballooned to more than a trillion dollars. As you point out, a lot of the private credit in there is floating rate debt, which means that if interest rates rise, that it's going to cause real problems for the servicing cost of the AI buildout. And so, we can see how this all kind of funnels down through the economy and results in the thing that investors are very worried about and don't want to happen, which is stock prices go down. And I just think that this is becoming more and more a possibility, closer to a probability. And it seems to me that investors are kind of downplaying the negative impacts of inflation specifically on stocks. And I've been wondering about why that is. Like, why aren't investors as worried as you might think that we're seeing historically very, very high inflation that doesn't appear to be set to come down anytime soon? And again, we've had no indication that this war is going to end because every time Trump says it's about to end, two days later he reverses course. And that's happened probably like seven or eight times in the past few weeks. So I've been thinking, like, why aren't they worried? One idea that I have in my head is maybe they're just optimistic by nature. Maybe that's just what it means to be an investor. Your default setting is things will work out. It's a better bet to just bet on the outcome being a good one because as we know, you don't make that much money shorting the market. You certainly don't make much money not being invested in the market. That's one reason. The other reason, though, is I wonder if inflation has just become inherently politicized and the politics are skewing investors' perspective, where to believe that inflation is an actual problem is to believe and to admit that Trump made a mistake, that he one shouldn't have raised tariffs as an example, but two that he shouldn't have attacked Iran, that he shouldn't have invaded the Middle East, or at the very least that his strategy in doing so was a fumble. But I wonder if investors just don't want to admit that. And we should be clear, we see this from investors on the left and from investors on the right. But it seems it's happened to such a degree where to admit that we're seeing structural issues in the economy is to admit that the president, who has become this sort of larger-than-life personality in the minds of many investors, is wrong about something, that his strategy was flawed. And I wonder if that's inherently pushing investors to try to downplay or ignore or put their blinders on and think, no, it's not a problem, everything's fine. Yeah, we'll just leave in a couple weeks. Yeah, it's going to be okay. And that might be a real problem over the long term. It seems that the bond investors have decided, no, this is a problem. But over in the stock market, you're not really seeing that.

So despite the fact that I worked in fixed income, I always have a difficult time, other than saying your auto loans are going to go up, trying to explain why interest rates are so important for the economy. And so the first thing that happens when interest rates go up is that the first casualty is speculation. And so growth companies, which have been driving the market, right, 94% of the S&P gains have been from AI companies or AI-related companies, and it's all about growth. And essentially these companies aren't making a lot of money right now, but their potential because they're growing so fast is that in five, ten years they might be generating more topline revenue than Microsoft. But revenue five years out with higher interest rates means that that revenue isn't worth as much now. So growth stocks get hammered because they're all about projecting huge cash flows in the future, which when reverse-engineered or valued back to, you know, a dollar in 10 years when interest rates are 2% is worth, you know, 90 cents now. A dollar at interest rates of 6% in 10 years, you know, is worth 45 cents or 55 cents, right? So it just the speculative stocks get crushed, right? So translation, the economy, you know, the fantasy economy goes into recession first. Housing gets hit next. Monthly mortgage payments explode, affordability collapses, and this really, as most economic shocks, takes a toll on the people who can't afford to pay cash for their house. So first-time buyers, young people get especially hard hit. It also hits leverage. So private equity, commercial real estate, regional banks, anything dependent on rolling over cheap debt starts sweating, right? And then consumers finally pull back because of credit card debt, auto loans, and financing costs suddenly become real instead of background noise. And businesses cut hiring, layoffs follow, and you kind of enter into this little bit of a doom loop. But the reality is, and this is why capitalism is just such a gorgeous organism, rate spikes are painful because they're supposed to be. They're kind of the economy's way of destroying excess, repricing risk, and reminding everyone that capital actually has a cost. It's basically the ruler wrapping on the knuckles of the Trump administration's reckless economic policy and waking people up from this fever dream that AI is going to create 10 different Microsofts in the next 24 months. It's the alarm clock going off saying, no, you know, your dreams are over, my friend. It's the cold shower that we've, you know, we've all been needing to take for a while.

Which would be just devastating to the markets if that were to actually transpire. And I think, I mean, you made the point about how the bond markets going back a year ago to Liberation Day and the tariffs, the bond market was the adult in the room. Trump issued these tariffs. He came out with his stupid billboard in the garden and everyone freaked out. Stock market investors freaked out. Bond investors particularly freaked out where you saw the 10-year yield jumping more than 50 basis points in three days. It was the biggest three-day jump in more than two decades. It was huge. And Trump admits, oh, the bond market's freaking out here. And then he TACOs and he puts the tariffs on pause. And the learning from that was, okay, the bond investors, the bond vigilantes as they call them, they're the ones who are going to sort of steer Trump's sort of wacko policy in the right direction if he starts to do things they're going to have real serious consequences in the markets. So the question then becomes, like, is the same going to happen in the current situation? Will bond yields today change Trump's economic policy like he did with the tariffs? The trouble is the new policy is a war in Iran, which is a lot more difficult to just turn off. I mean, we've already spent, I mean, according to Pete, more than $25 billion on the war. That was a month ago that he said that. So it's probably a lot larger. Trump's already requested $1.5 trillion for the defense budget for next year. We've already lost 13 lives, nearly 400 wounded. Many other lives have been lost. I mean, the costs here are a lot more significant and a lot more personal, a lot more sensitive. And so, the idea that the bond yields are going to go up and then Trump is just going to be like, 'Okay, I'm going to turn off this war and we're going to open this strait back up and just concede defeat to Iran.' That's just not going to happen. So the difference between today and last year is that you don't have that same wrapping on the knuckles mechanism as you just put it because there's so much more to lose here. It's so much harder to get out of this one. As you say, it's a quagmire. That wasn't the case with the tariffs. So I just wonder if we're actually in potentially a more difficult situation than we were last year where it was kind of easy to steer him in a certain direction. But with this, when it's a hot war, when you're firing weapons, firing missiles, when you're sending ships over, physical ships over to attack a nation, and now we're in the midst of this thing, I'm just not sure that the bond markets have the power that they used to have. Which to me suggests that yields will only continue to rise, which increases the likelihood that all of those dominoes will fall in the way that we just laid out. So, this is something to certainly keep an eye on. I don't think we should ring the bell right now and call it, okay, now the bear market's going to happen. I don't think that's the right takeaway. But certainly what we should be doing is keeping a very close eye on those bond yields, keeping a very close eye on inflation and understanding and being realistic about how long will we stay in Iran. How long will the strait continue to be blockaded? Because that is the thing that is driving all of the inflation that we're seeing, not just America, but around the globe and why you're seeing those bond yields rise in other nations as well.

Low rates not only create the illusion of prosperity, they create the illusion of genius. And that is, okay, my economy is doing great. I can spend $7 trillion and $5 trillion in receipts and juice the economy and keep stock prices high. And then all of a sudden, what you find out is, do you have a real economy? Do you have sensible economic policies? And do you have a real business? And you know, I hate to say, and unfortunately again, it hits earners more than it hits owners because if you own real estate, the wealthiest people in Argentina really haven't changed much because despite massive inflation, the wealthy families there bought land and they bought hard assets. So inflation hits earners. It hits people because typically during inflationary periods, wages don't keep pace with the cost of goods. So everyone's prosperity goes down. Whereas owners, if inflation goes up, then asset values go up typically, not always. You know, sometimes if you have stocks they get hit hard, but inflation is, it really attacks the society because one of the things or one of the myths about society is that everyone talks about unemployment, that when people aren't working they get antsy and angry, and that's true, but where they get violent or chaotic is when they're working and they're still hungry. And that's what inflation does. It attacks your prosperity where you feel like, okay, I'm working two jobs and I can't afford to buy diapers.

And that's exactly what we saw last month where real wages fell because inflation outpaced wage growth. And it's likely that that's going to continue. We'll be right back after the break. And by the way, we will be taking a break from the feed while we travel for the tour, but tune in on Friday for our show live from San Francisco.

Support for the show comes from DeleteMe. Have you ever thought, I should really be doing something to protect myself from stalkers, scammers, and hackers, but you're not sure what? Here's what you can do. Go to joindeleteme.com/profg and enter code PROFG. You'll get 20% off DeleteMe. DeleteMe removes your personal information that's being sold online. You can get an individual plan for a little over $8 per month. Discounts get even better with a two-year plan or when you enroll with your partner or family. Our producer, Jennifer Sanchez, tried DeleteMe, and here's what she thought. Jennifer?

Take control of your data and keep your private life private by signing up for DeleteMe now at a special discount for our listeners. Get 20% off your DeleteMe plan when you go to joindeleteme.com/profg and use promo code PROFG at checkout. The only way to get 20% off is to go to joindeleteme.com/profg and enter code PROFG at checkout. That's joindeleteme.com/profg, code PROFG.

Support for the show comes from Framer. First impressions matter, and if you're a business owner, then having a messy website is basically the same as not showering before that in-person job interview. Thankfully, Framer helps show off the best parts of your business. Framer is an enterprise-grade no-code website builder used by teams at companies including Perplexity and Miro to move faster. With real-time collaboration and robust CMS with everything you need for great SEO, not to mention advanced analytics that include integrated A/B testing, your designers and marketers are empowered to build and maximize your .com from day one. So whether you want to launch a new site, test a few landing pages, or migrate your full .com, Framer has programs for startups, scaleups, and large enterprises to make going from idea to live site as easy and as fast as possible. Learn how you can get more out of your .com from a Framer specialist or get started building for free today at framer.com/markets for 30% off a Framer Pro annual plan. That's framer.com/markets for 30% off. framer.com/markets. Rules and restrictions may apply.

We're back with Prof G Markets. One of the most anticipated IPOs in years is finally happening. SpaceX officially filed to go public last week, giving investors their first detailed look at the company's financials ahead of the company's planned debut on June 12th. The company is reportedly looking to raise at least $80 billion, which would make it the largest IPO in history, and it could be just the beginning of a major wave of blockbuster offerings with OpenAI also reportedly preparing to file in the coming weeks. So, Scott, the SpaceX numbers are finally out. I cannot wait to dig into this with you. Let's just look at 2025 revenue, $19 billion. Q1 revenue, $5 billion. Q1 net loss, $4.3 billion. So much to talk about here. Where do you want to start?

I want to start with the ayahuasca trip. So the first 14 pages of the S-1 include pictures of rockets. AI was mentioned over 200 times in the S-1. For context, it's longer than The Great Gatsby or The Catcher in the Rye. And here are some direct quotes from the filing. These are my favorite. 'We do not want humans to have the same fate as dinosaurs.' Well, thank God you're here, Elon. 'For decades,' this is another quote, 'for decades, a reality where humanity travels between the planets and the stars has felt tantalizingly close, but still locked in the pages and screens of science fiction.' Okay. 'The sun contains approximately 99.8% of the solar system's energy. And as a result, we believe it is the only truly scalable solution to terrestrial energy constraints in the age of AI.' Jesus Christ, put the [__] pipe down. 'We believe the next paradigm shift for humanity is the creation of a resilient, perpetually expanding spacefaring civilization, ultimately preparing us to achieve Type II status,' defined in the filing itself as a civilization that harnesses the full energy output of the sun. Okay, now give me $1.8 trillion. And effectively what you have here is you have a core business that is genuinely excellent. Starlink generated $3.3 billion in revenue in a single quarter with $1.2 billion in operating income. That's a 36% operating margin on a monopoly satellite internet business with no serious competitor in sight. Let's give them that.

Totally.

If this were the whole company, it would be one of the great businesses of our era.

Yes. But it's not the whole company.

Stapled onto this rocket ship is xAI, a business that is clinically speaking a money furnace. In 2024, xAI lost $1.6 billion on $2.6 billion in revenue. By 2025, losses ballooned to $6.4 billion on $3.2 billion in revenue. Revenue went up 22%. Losses went up 310%.

And by the way, just to interject there, let's look at first quarter of 2026. The AI unit's losses for one quarter alone are up to $2.5 billion. So if we're going to annualize that out, we're up to $10 billion. But of course, it's going to be even more because it's actually growing exponentially. You look at the net loss for the whole company for the first quarter of 2026, their losses grew by 700% year-over-year in one year. So these losses are insane. Like totally, totally absurd. And to your point, it's not coming out of the connectivity business, which is the satellites. That is a profitable business. That is a great business. Starlink is amazing. We've said that for a long time. It's coming out of one, the space unit, which by the way, it's not that bad. It's a $600 million loss in Q1, but mostly it's coming out of AI. AI is the money incinerator in this business. It has gotten way out of control and it's all because he's decided to merge that company, fold xAI into SpaceX, which is, as you say, sort of the bag of [__] that's been stapled to the actual business in order that he can command this ridiculous valuation.