0:00 The 30 -year Treasury yield just hit the highest level since 2007. And if you're thinking, cool, who cares? Well, you're not alone. Because Treasury yields sound like the kind of thing that only matters to men in Patagonia Vest, who drink $8 iced lattes and talk about risk -adjusted returns at dinner parties. But the reality is, hidden inside that number is the price of money, because that single number helps determine the borrowing cost on trillions of dollars of debt. And for the first time since 2007, trillions of dollars of debt. And for the first time since 2007, it's flashing a signal we haven't seen in nearly two decades. But the real story isn't just the headline number you see on social media, it's the damage that number is quietly causing underneath the surface. And that damage is starting to surface in a $2 trillion asset class
0:46 where the cracks are becoming harder to ignore. But here's the part that's strange. Even as interest rates are rising at the fastest pace in recent history, and signs of credit stress are materializing in the data, many of the players in the industry are still selling. credit stress are materializing in the data, many of the players in the industry are still selling the idea that everything is under control, that this is all overblown, and the market remains as healthy as ever. But the reality is, those two things can't coexist. And that's what makes this so interesting, because this story has only just begun, and it's quietly unfolding right in front of our eyes in real time. And there's a reason you haven't heard about this. It's not by accident. The hush -hush surrounding all this is by design. But to understand what's happening, we need to back up. And we have by design. But to understand what's happening, we need to
1:33 back up. And we have to start with that one number from earlier. Because when the 30 -year treasury spiked to over 5%, the United States had at least one thing going for it. At least there was company. Because the UK's 30 -year just climbed to its highest level since 1998, while Germany's 30 -year reached its highest level since 2011. And not only did Japan's 10 -year rise to levels it hadn't seen since 1999, but Japan's 30 -year is now sitting at an all -time high. So when four of the largest sovereign bond markets in the world start doing their best impression of Dogecoin after an Elon Musk tweet, it raises one very important question. What the f*** is happening? Because the bond market's supposed to be boring, it's supposed to be predictable, uneventful, and something your grandpa falls asleep watching. And that's why it
2:22 often gets labeled as the adult in the room. But right now, while everyone's distracted watching stocks go vertical and the AI hype, stocks go vertical and the AI hype. The adult in the room quietly just pulled the plug on the party. And before we get into what higher yields actually mean for the economy, and why investors are quietly freaking out, it's worth taking 30 seconds to explain what makes a bond yield move in the first place. Because the movement in the yields is the real story. What matters is the underlying mechanics of why they moved. The number you see in the headlines is just the symptom. And in its simplest form, a bond is just an I owe you. It can be the government, a company, or anyone who wants to borrow money. They issue a piece of paper that promises
3:10 to pay back a fixed amount at a fixed maturity date. People bid for that paper, and the price those buyers are willing to pay determines the yield. So the relationship between a bond's price and its yield are inversely related. If buyers are scrambling to buy the bond, the price gets bid up, and the yield falls. If buyers aren't interested, the price has to drop to attract new buyers, and the yield rises. Price down, yield up price up yield down that's the relationship between a bond's price and its yield so when yields are rising across the board it means buyers are demanding a higher return before they'll lock their money up and that happens for four main reasons first the federal reserve the fed sets the baseline interest rate for the entire economy so if the
3:56 fed raises the baseline rate to five percent nobody wants an old bond paying just three percent so to get rid of that old bond sellers have to slash its price until its yield matches the new rate environment. Second, inflation. If you think your dollars are going to be worth less when the bond matures, you want more return up front to compensate. Third, supply. The U .S. has been issuing Costco -sized amounts of new debt every year. At some point, the auction room starts running out of hands willing to go up. So more supply means fewer eager buyers, which leads to prices falling and yields rising. And fourth, demand. which leads to prices falling and yields rising. And fourth, demand. Foreign central banks, pension funds,
4:42 sovereign wealth funds, the institutions that used to reliably show up at treasury auctions, if they start to doubt that the U .S. can pay back its nearly $40 trillion of debt, well, they start to pull back. And if that happens, the price has to drop until someone is finally willing to walk in. And what makes bond yields a favorite for economists is each maturity tells a different part of the story. tells a different part of the story. Each maturity sends a different signal about the economy. The two -year mostly reflects what the market thinks the Fed will do in the near term. The 10 -year is the favorite. It's the global benchmark. Almost every other rate across asset classes gets anchored to it. And the 30 -year? Well, it's the rate that asks the question, do you actually trust the United States fiscal situation
5:28 long term? It prices three decades of inflation, three decades of deficits, and three decades of United States fiscal decisions. But while the long end and three decades of United States fiscal decisions. But while the long end of the yield curve is sitting at levels we haven't seen in nearly two decades, that's actually not even the scariest part. Because if there's one thing the Federal Reserve has mastered, it's taking today's problems and handing them to tomorrow. But there's some problems that can't be passed off. Because what's causing the real pain right now is on the other end of the yield curve, the short end. And it's the short end that the Fed has their little greasy fingerprints all over. But before we get into that, a quick pause. Because here's a number. all over. But before we get into that, a quick pause because here's a number that stuck with me. Back in 2008, researchers at UC San Diego found
6:16 the average American takes in roughly a hundred thousand words and 34 gigabytes of information every single day. And that was before the first iPad existed. Imagine what that number looks like now. So if you're like me, your Notes app is a graveyard of half -finished thoughts and your voice memos are ramblings you never replay. Which brings us to the sponsor of today's video, Plod. With the PlodNote Pro, you can transcribe your conversations, calls, and notes into clear summaries and searchable insights. And it's not just for audio either. With Plod's unique multimodal input, you can add text and images too, so the full context lives in one place. So for a video like this one, I can simply ask Plod, what was the relationship between a bond's
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7:49 SOFR. You can think of it as the overnight receipt for the entire U .S. financial system. It's a single number, published every morning, that tells the market what overnight borrowing actually cost the day before, based on real transactions. It's not a guess or a target rate. It's based on actual trades that have been cleared and settled. In early 2022, SOFR was effectively zero. Then the Fed started hiking, and by mid -2023, SOFR was over 5%. And now, even after a year and a half of rate cuts, it's still sitting higher than where we were before the pandemic. And when rates rise this aggressively, there's consequences. Because when most people think about debt, they think fixed rate, like a mortgage. You lock in an interest rate on day one, the
8:36 rate environment can do whatever it wants afterward, and your payment doesn't change. But there's an entire other category of debt. and your payment doesn't change. But there's an entire other category of debt called floating rate, which works the opposite way. A floating rate loan doesn't pick a fixed rate at origination. It picks a benchmark, which is almost always SOFR, and then it adds a spread on top. That spread is the lender's premium for taking on the risk. With floating rate loans, the interest rate on the loan is directly tied to the benchmark it's pegged to. So if SOFR moves, the interest rate on the loan moves too, meaning if SOFR rises, the borrower's interest on the debt rises. And I think you can... Meaning if SOFR rises, the borrower's interest on the debt rises. And I think you can see where I'm going with this. is where the consequences of rapidly rising rates begin to show up. And to see
9:23 where the impact lands, we need to follow the money a little further downstream, to private credit. is essentially just private lending. They hit the weird middle market of the credit world. It's loans for companies that are too large for a local small business loan. Too small to issue public bonds on Wall Street, or too complex for a traditional bank to feel comfortable underwriting. plex for a traditional bank to feel comfortable underwriting so these companies are forced to go to private lenders to borrow money and these private credit loans have two key characteristics that help explain everything that's happening the first is that these loans almost never trade these are loans that happen in the dark there's no public price nobody marks it every morning the loan's value is appraised on a predetermined schedule usually once a quarter and we'll get more into why this
10:09 is so important later the second is that the vast majority of these private credit Second is that the vast majority of these private credit loans are floating rate, and that floating rate feature is important to watch. Because remember, on a floating rate loan, when the benchmark moves up, the borrower's interest on the loan moves with it, meaning the loan becomes more expensive to service, the borrower pays more, cash flows get tighter, and the margin for error shrinks, which becomes a problem for private credit lenders because their returns depend on those payments continuing to arrive on time. And the problems have already started, and they're unraveling in real time as you watch. And the problems have already started, and they're unraveling in real time as you watch this video. In 2021, a software company called Pluralsight was acquired by private equity firm Vista Equity Partners.
10:58 And Vista did what private equity firms do. They funded the acquisition with a few billion dollars of equity, and then over a billion dollars in private credit loans, for a total price tag of over $3 billion. And when a deal like this happens, the acquired company takes on the debt. So Pluralsight's balance sheet went from its own independent structure to such... So Pluralsight's balance sheet went from its own independent structure to suddenly carrying over a billion dollars of new debt from private credit. And this debt just happened to be in the form of floating rate loans pegged to SOFR, which was fine, for about three years, because while SOFR was still near zero, the math worked. But then, SOFR went from zero to over 5%, and suddenly, Pluralsight was underwater. And by August 2024, it was over for Pluralsight. Their interest payments were
11:45 now unsustainable, and a group of private credit lenders were... forced to step in, convert their debt to equity, and inject an additional $275 million of new money into the business. And as their reward for doing so, they took 85 % of the company. And this is just a single example of the rising rate problem that's quietly spreading across the private credit market. Which brings us to a quote I came across while researching for this video. And if I'm being honest, it might be a new personal favorite of mine. Because in J .P. Morgan's third quarter earnings call, new personal favorite of mine because in jp morgan's third quarter earnings call from 2025 when ceo jamie diamond was asked about the cracks in the credit market he responded when you see one cockroach there are probably more which is hilarious for
12:33 so many reasons but it's also true and it's also exactly what the data is showing us because earlier this year the fitch private credit default rate which tracks more than 1500 middle market private credit borrowers hit six percent on its trailing 12 -month measure which is the highest rate recorded since in se sent on its trailing 12 month measure which is the highest rate recorded since inception and the reason that number is significant is the scale behind it because the private credit market has exploded in recent years up almost tenfold since 2007 and like i mentioned earlier it's an industry where the foundation is built on these floating rate loans which matters because plural site wasn't unique it was just one borrower in a massive stack and most of that stack is borrowing off sofa just like plural site did which means nearly all the
13:19 companies that borrowed Pluralsight did, which means nearly all the companies that borrowed from private credit just absorbed the same compounding rate shock as Pluralsight. So, how is it possible that the data is showing record defaults while everyone in the industry is acting like things are all good? And the answer is, sneaky accounting. More specifically, one of the more creative accounting structures the finance industry has ever produced. Because if there's one thing the finance industry excels at, no pun intended, it's taking something that started as a reasonable idea and letting greed take over. It's taking something that started as a reasonable idea and letting greed take over in a way that would make the Rockefeller family blush. So, what exactly are they doing, you ask? Well, it's called a payment -in -kind feature, or a PIC, and it lets a borrower make interest payments on a
14:07 loan in a form other than cash, which I can't even believe that's something I'm saying out loud, considering interest is supposed to be the cash return a lender earns for lending money. So what happens in a world where SOFR jumps from 0 % to over 5%, the interest payments on the loan get a whole lot more. 0 to over 5%, the interest payments on the loan get a whole lot more expensive, and the borrower can no longer keep up. Well, that's where picks come in. The lender offers the borrower the option to pay in kind instead, which is the polite way of saying the borrower does not pay. The unpaid interest then gets added onto the principal, and the balance owed at maturity grows. Which is funny because normally in finance, when a borrower can't make the cash interest payments on a loan, that's classified as entering into default. And the default is the trigger. It's what lets the lender
14:53 call the loan. fault. And the default is the trigger. It's what lets the lender call the loan, force a restructuring, and start the slow walk toward bankruptcy court. The loan gets stamped as non -performing, and everyone can see the damage. But a pick feature removes that trigger. Because with a pick, when the borrower can't make the cash payment, the loan flips to be paid in kind, and the interest owed just gets added to the balance instead of being paid with cash. Which means, when there's a pick, technically speaking, no payments were missed, and nothing defaulted, and the loan is still counted as performing. missed and nothing defaulted and the loan is still counted as performing even when there was actually no cash received and when the lenders meaning the private credit funds enter into these payment in kind arrangements they report the unpaid interest as income meaning the interest that was never actually paid for in cash is counted as
15:41 income and don't worry it gets even worse because a significant portion of the private credit market operates through a type of investment vehicle called a business development company or bdc these funds follow specific regulatory rules and in exchange they get favorable tax treatment, including zero corporate income tax. But to keep that tax status, they are legally required to distribute at least 90 % of their taxable income to investors. And remember when I said in pick arrangements, the unpaid interest is reported as income? Well, here's what all this looks like. A company sliding toward insolvency shows up on the books as a healthy, income -generating asset. The interest it cannot pay gets capitalized into the principal. rating asset the interest it cannot pay
16:28 gets capitalized into the principal the fund reports that capitalized interest as income and because the fund is legally required to distribute 90 of its taxable income it mails out a cash dividend to investors on money it never actually collected so the higher interest rates rise the worse the borrower's financial position gets the more interest they owe to the lender the more income the private credit fund reports and the larger the dividend it must send out on cash that was never actually and the larger the dividend it must send out on cash that was never actually collected and that's the sneaky accounting and it's been spreading rapidly around 11 and a half percent of private credit loans now include pick features which is an increase of more than 72 percent since the end of 2021 and more than half of those were classified as bad picks
17:17 meaning the pick feature was not part of the original loan it was added later likely after the borrower started struggling and across the public funds in this asset class meaning the business development company Across the public funds in this asset class, meaning the business development companies, PICs run on average around 8 % of the fund's income, meaning roughly 8 cents of every dollar these funds report as income is interest nobody actually paid in cash, and there's examples where it's much worse. Like FSKKR, who was running PICs at more than 14 .5 % of their total investment income, and their non -accrual loans, meaning loans where borrowers have stopped making payments entirely, reached over 5%. And it's just like Jamie Dimon said on that October. reached over 5%. And it's just like Jamie Dimon said on that October earnings call, when you see one cockroach, there
18:05 are probably more. Because earlier this year, Fitch recorded 11 default events in a single month, nearly double the 2025 monthly average of 5 .9. And of those 11 defaults, more than 60 % of them involved the introduction of payment in kind interest, instead of cash interest payments. And there's still one final layer to all this. It's not just about how the income gets reported. It's also about how the loans themselves get value. come gets reported, it's also about how the loans themselves get valued. Since these loans don't trade on any exchanges and there's no public market price you can just look up, they fall under an accounting label called Level 3, which is the most illiquid and subjective category of asset measurements in financial reporting. It's a label that shows it relies entirely on unobservable inputs and internal models rather than active market data. An
18:54 MSCI recently found that more than 10 % of private credit loans were already marked down by at least 50 cents. then 10 % of private credit loans were already marked down by at least 50 cents on the dollar. And that's how a tidal wave has been quietly building in the background, and it's what people are calling the private credit maturity wall. It's a wall of roughly $85 billion in BDC loan maturities coming due between 2026 and 2029, and when that hits, these companies will have to refinance at today's rates. And when all this near -zero debt has to roll at today's rates, someone has to face the consequences. And if you want to watch when this actually hits, and not just... face the consequences and if you want to watch when this actually hits and not just read about it afterward subscribe because this story is still in the early innings and I'll be covering it closely as it
19:42 unfolds because the truth is you may be able to hide a loss in an accounting line you can roll unpaid interest into a bigger principal and you can even call a distressed borrower a performing loan but the math is still the math and bad math doesn't just disappear
