Jim Bianco: Investment Risks and Opportunities from Rising US Interest Rates

2025 has kicked off with concerns over rising interest rates, stubborn inflation, and Trump policy uncertainty. Jim Bianco, president of Bianco Research, recently joined Financial Sense to discuss his view on the investment environment as long-term interest rates and borrowing costs push back towards 15-20 year highs.

Podcast audio: Revolt in the Bond Market: Jim Bianco on Why the Fed’s Rate Cuts Are Backfiring

Inflation Concerns Rising Again

Last month, the Federal Reserve delivered its third rate cut since September, a move that might seem counterintuitive given the current economic backdrop. However, the market’s response has been far from enthusiastic. Long-term Treasury yields have climbed a full percentage point since the first rate cut, reaching levels not seen in decades. Bianco noted this unusual dynamic, explaining, “The last time we saw the Fed cutting rates and long-term yields rising was in the 1960s and 1970s, when inflation was a major concern.”

The market’s reaction stems from a growing belief that rate cuts are not only unnecessary but potentially inflationary. Bianco pointed out that the U.S. economy is already operating near its growth potential, with inflationary pressures emerging from fiscal policies such as tariffs, deregulation, and tax cuts. “If the Fed cuts rates in an already stimulative environment, it risks producing higher levels of expected inflation,” he said. This, in turn, erodes the value of fixed-income investments, making bonds less attractive to investors.

Bianco emphasized that the post-2020 era has ushered in a new economic paradigm. “We’re no longer in a low and stable inflation world. Instead, we’re in a 3% to 4% inflation world with higher interest rates,” he explained. In this environment, the Fed’s decisions carry heightened risks, as cutting rates below their “natural level” could overstimulate the economy and further fuel inflation.

A New Era for Interest Rates

Bianco challenged the perception that low interest rates are inherently better for the economy. He argued that the “perfect” interest rate should approximate the economy’s growth rate, which includes inflation and real growth. For the U.S., this translates to rates around 5.5% to 6%.

“There’s this belief that any rate above zero is bad, but that’s not necessarily true,” Bianco said. “We might be returning to a world where 5% to 6% rates are normal, like they were before 2008. People need to adjust their expectations—2% to 3% mortgages were a product of a different era.”

This shift has significant implications for both businesses and consumers. Higher rates make borrowing more expensive, but they also reflect a healthier, growing economy. The challenge lies in managing this transition without overstimulating or destabilizing markets.

10-year interest rates back to levels not seen since 2006-2008

10 year interest rate
Source: Yahoo! Finance, annotations by Financial Sense

The Stock Market: Concentration and Valuations

Turning to equities, Bianco highlighted the growing dominance of a handful of stocks—the so-called “Magnificent Seven” (Mag 7), which include tech giants like Apple, Microsoft, and Nvidia. These companies now account for 34% of the S&P 500, the highest concentration in history.

“The market has become incredibly narrow,” Bianco observed. “Market breadth—the number of stocks advancing versus declining—has been at its worst levels ever, yet the S&P has held up because of these few mega-cap stocks.”

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Bianco singled out Nvidia as the linchpin of this dynamic. “Even if you don’t own Nvidia, its performance impacts everyone. It’s at the center of the AI revolution, and its $3 trillion market cap makes it one of the most important companies in the world,” he said. However, he warned that the lofty valuations of these stocks are contingent on the rapid realization of AI’s potential.

“The market has already priced in the AI revolution,” Bianco cautioned. “If it takes longer to unfold, investors could grow impatient, leading to turbulence in these stocks.” He drew a parallel to the dot-com era, noting that while the internet eventually transformed the world, many tech stocks suffered massive losses in the early 2000s as expectations outpaced reality.

The Bond Market: A Competitive Alternative to Stocks

One of the most significant shifts in today’s financial landscape is the resurgence of bonds as a competitive investment alternative to stocks. With yields approaching 5%, bonds now offer returns comparable to equities but with far less volatility.

“In the past, we lived in a world of TINA—‘There Is No Alternative’—to stocks, because bond yields were so low,” Bianco explained. “But that’s no longer the case. Today, you can get a stable 5% return from bonds, which is close to the 6% to 7% expected return for stocks over the next decade.”

This shift has profound implications for portfolio allocation. “For the first time in years, conservative investors have a viable alternative to equities,” Bianco said. He also emphasized the importance of active management in the bond market, noting that professional managers can often outperform passive indexes in fixed income.

Fiscal Challenges and the Risk of a "Liz Truss Moment"

Bianco expressed concern over the U.S. government’s fiscal trajectory, with the national debt surpassing $36 trillion and annual deficits approaching $2 trillion. He likened the situation to the “Liz Truss moment” in the U.K., when bond markets rebelled against unsustainable fiscal policies, forcing a rapid policy reversal.

“The only thing that will stop the budget deficit is the bond market,” Bianco warned. “At some point, investors will demand higher yields to compensate for the risk, driving up borrowing costs and forcing policymakers to act.”

Bianco was skeptical that meaningful fiscal reform would occur without a crisis. “The bureaucracy will fight tooth and nail against budget cuts. Unfortunately, it’s likely that the bond market will have to force change by running out of patience,” he said.

A More Balanced Investment Environment

As 2025 unfolds, Bianco sees a more balanced investment landscape, with opportunities in both stocks and bonds. He emphasized the importance of adjusting expectations to the new economic reality of higher inflation and interest rates.

“For conservative investors, this is a good time,” Bianco said. “Bonds now offer real returns above inflation, providing a viable alternative to equities. Meanwhile, the stock market still offers opportunities, but investors need to be mindful of valuations and the risks of concentration in mega-cap stocks.”

Bianco’s parting advice? Be patient and pragmatic. “Markets move in cycles, and we’re in a different era now. Whether you’re investing in bonds, stocks, or anything else, understanding the broader context will be key to navigating the year ahead.”

For related podcast interview, see Revolt in the Bond Market: Jim Bianco on Why the Fed’s Rate Cuts Are Backfiring. If you’re not already a subscriber to our FS Insider podcast, click here to subscribe.

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