Are We Reliving the 1990s?
Markets rose despite mixed economic signals. Stocks posted gains in Q2, with stocks climbing on the back of strong corporate earnings, resilient consumer spending, and ongoing enthusiasm around AI-related investments.
Author
Chris McCall
Why today's higher bond yields may represent opportunity rather than crisis.
Key Points:
- The 1990s show that technology investment can precede productivity gains.
- Heavy demand for capital can push interest rates higher - even with contained inflation expectations.
- Faster productivity growth and modest inflation can help the economy keep pace with rising debt.
- Fear about debt and inflation can push bond yields high enough to create investment opportunity.
Over the past several months, we've spent a lot of time thinking about the rise in long-term interest rates. The 10-year Treasury yield has been moving closer to 5%, federal debt continues to climb, and concerns about inflation and the U.S. dollar seem to be everywhere.
It is easy to connect those dots in the most troubling way… that investors might be losing confidence in the United States, the dollar is at risk, and something is about to break.
Those risks shouldn't be dismissed. But perhaps we are looking at today's bond market through the wrong historical lens.
What if the better comparison isn't a fiscal crisis?
What if it is the 1990s?
A Period That Looked Uncomfortable Before it Looked Exceptional
The 1990s are remembered as a remarkable decade. Growth was strong, unemployment declined, inflation remained contained, and productivity eventually accelerated.
But that outcome was not obvious at the beginning.
Businesses had been spending heavily on computers, software, telecommunications equipment, and the early internet. Yet for years, economists struggled to find those investments in the productivity data. Companies owned the technology but had not learned how to reorganize around it.
That changed in the second half of the decade. Workers became comfortable with computers, businesses redesigned processes, and networks connected offices, suppliers, and customers. Technology became something companies understood how to use.
The difference eventually showed up clearly in the numbers. According to the Bureau of Labor Statistics, labor productivity grew at an average annual rate of about 1.5% from 1990 to 1995, then accelerated to 2.7% from 1995 to 2000 - an increase of about 80% in the rate of productivity growth.1
Federal Reserve research later estimated that information technology accounted for roughly two-thirds of the improvement in productivity growth between the first and second halves of the 1990s.2
Plenty of technology investments failed. The broader economic benefit simply arrived later than the spending.
That feels relevant today.
Companies are investing extraordinary sums in semiconductors, data centers, power generation, software, automation, and robotics. Most businesses are still learning how to incorporate artificial intelligence into daily operations. We see impressive demonstrations, but broad productivity statistics have not yet reflected the spending.
Perhaps that shouldn't surprise us. Infrastructure comes first. Businesses then experiment, reorganize, train employees, and discover uses that weren't obvious initially.
What Higher Real Yields May Be Telling Us
This technology buildout requires an enormous amount of capital. That matters for the bond market. When an economy suddenly has many productive places to invest money, borrowers have to compete harder for that capital.
When businesses and governments both want capital, its price can rise. That price is the interest rate. Higher yields can reflect inflation or fiscal concern, but also strong investment demand, expected growth, and the possibility of better future returns on capital.
The distinction becomes clearer when we separate the Treasury yield into expected inflation and the return above it - what we might call the implied real yield.
Today, the 10-year Treasury yield is roughly 4.7%, while the Cleveland Fed estimates expected inflation over the next decade at approximately 2.5%. The difference is an implied real yield of about 2.2%.3,4
Subtracting the Cleveland Fed’s estimate of expected inflation from the 10-year Treasury yield suggests that implied real yields of 3% or more were common during the 1980s and 1990s. In the later 1990s, those yields existed alongside strong economic growth, improving productivity, and contained inflation.3,4
If the 10-year Treasury rose to 5.5% while expected inflation remained near 2.5%, the implied real yield would approach 3%. That would tighten financial conditions. But it would not automatically mean runaway inflation or national insolvency. It could partly reflect strong competition for capital and the possibility of higher future returns on capital.
The Debt Problem is a Race, Not a Countdown
What if the global debt problem is never truly solved… but instead continues to be managed?
When thinking about government debt, perhaps we are asking the wrong question. Rather than asking, “How will we ever pay all of this back?”... a more useful question might be: How large is the debt relative to the economy supporting it, and can the country continue servicing it?
Government debt does not necessarily have to disappear. It has to remain manageable.
In many ways, that makes the debt problem a race between two numbers: the growth of the debt and the growth of the economy. Current Congressional Budget Office projections suggest publicly held federal debt could grow nearly 6% annually over the coming decade, while the economy grows closer to 4% in nominal terms.6
Put simply, if your debt grows 6% each year while your income grows only 4%, the burden becomes progressively harder to carry. We do not necessarily need to pay down trillions of dollars of debt. We eventually need to bring the growth of the economy closer to - or above - the growth of the debt.
This is also where inflation becomes more nuanced. High and unpredictable inflation is damaging, but modest inflation can help make an existing debt burden more manageable. If real economic growth is 2% and inflation is 2%, the economy grows approximately 4% in nominal terms. If inflation instead averages 3%, nominal growth approaches 5%. Wages, revenues, GDP, and tax receipts rise, while previously issued fixed-rate debt becomes less burdensome relative to the economy.
The Federal Reserve’s 2% inflation target, which was formally adopted in 2012, remains an important anchor for expectations. But 2% is not a magical dividing line between a healthy and unhealthy economy. History suggests productive economies can coexist with stable inflation of 2.5% or even 3%. The greater danger is inflation that becomes high, unpredictable, or causes investors to lose confidence in monetary policy.5
None of this means the debt problem is not real. Some combination of economic growth, moderate inflation, spending restraint, additional revenue, and fiscal reform will ultimately be required to keep it manageable.
But investors should distinguish between a deteriorating fiscal situation and an investment whose price already compensates them for that deterioration. We have experienced healthy economic periods when Treasury yields offered substantial returns above inflation. If debt fears push yields meaningfully higher without producing an actual fiscal or inflationary crisis, that fear may ultimately create opportunity.
A Weaker Dollar is Not the Same as a Collapsing Dollar
The same perspective applies to the dollar. The dollar could certainly weaken, particularly after periods of strength. But currencies are relative. The dollar doesn't weaken in isolation. It weakens against another currency.
Europe, Japan, and China face their own combinations of debt, aging populations, slower growth, or less-open financial systems. The United States still offers unusually deep capital markets, strong legal protections, and abundant liquid investments. The International Monetary Fund (IMF) reports that the dollar represented roughly 57% of global foreign-exchange reserves in early 2026, compared with approximately 20% for the euro, 5% for the Japanese yen, and just 2% for China’s renminbi.7
The dollar’s share may gradually decline as the world diversifies. But gradual diversification is very different from abandonment. This is one reason we maintain globally diversified portfolios at JBW - they provide natural participation if foreign currencies strengthen against the dollar.
From Warning Sign to Potential Opportunity
Higher yields are not painless. They increase borrowing costs, pressure leveraged investments, and create more competition for stocks.
But for bond investors, those same higher yields can create opportunity. They improve the income and future return potential of high-quality bonds while providing a larger cushion against future price declines.
That is why we’re increasingly viewing today’s bond market as a potential opportunity rather than an impending crisis. With inflation expectations reasonably anchored, investors may be receiving an attractive return above expected inflation. The headlines can get worse while the investment opportunity gets better.
For families who own bonds to provide income, stability, and funds for spending during stock-market declines, that matters. Bonds are becoming better equipped to do the job we ask them to do.
We believe there is a reasonable chance that AI will eventually produce significant productivity gains, although we don’t know how quickly they’ll emerge or whether they’ll match those of the late 1990s. In the meantime, the 10-year Treasury yield could stall near 5%, briefly reach 5.5% or higher, or simply decline from here as higher rates begin to slow the economy.
But perhaps that uncertainty is the point.
Rather than building a portfolio around an extreme prediction, we can recognize the risks, remain globally diversified, and take advantage of the income now available from high-quality bonds.
The 1990s remind us that a period of heavy investment and elevated real interest rates can feel uncomfortable before the broader economic benefits become visible.
Today's higher yields may be a warning worth respecting.
They may also be an opportunity worth understanding.
Sources and Further Reading:
1. Bureau of Labor Statistics, “Multifactor Productivity Trends,” March 25, 2009. https://www.bls.gov/news.release/archives/prod3_03252009.htm
2. Stephen D. Oliner and Daniel E. Sichel, “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Federal Reserve Board, 2000. https://www.federalreserve.gov/econres/feds/the-resurgence-of-growth-in-the-late-1990s-is-information-technology-the-story.htm
3. Federal Reserve Bank of St. Louis, “Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity,” FRED. https://fred.stlouisfed.org/series/GS10
4. Federal Reserve Bank of Cleveland, “Inflation Expectations.” https://www.clevelandfed.org/indicators-and-data/inflation-expectations
5. Federal Reserve Board, “Statement on Longer-Run Goals and Monetary Policy Strategy.” https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf
6. Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036, February 2026. https://www.cbo.gov/publication/61882
7. International Monetary Fund, “Currency Composition of Official Foreign Exchange Reserves,” first quarter 2026. https://data.imf.org/en/news/imf%20data%20brief%20july%201
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