Today's Interest Rates: Not the New Normal, Just Normal

• Federal budget deficit projected at $2.1 trillion for fiscal 2026, up from $1.9 trillion estimated earlier, with deficits above 6% of GDP supporting elevated longer-term yields through increased Treasury issuance
• AI-related corporate debt issuance expected to reach nearly $570 billion in 2026, more than double last year's pace, with infrastructure buildout creating near-term inflationary pressures before productivity gains materialize
• Current interest rates align with 2000-2007 levels and remain below 1980s-1990s rates, suggesting the post-Global Financial Crisis ultra-low-rate environment was the historical anomaly rather than today's rates

Summary: Interest Rates Returning to Historical Norms

Markets are scaling back expectations for near-term Federal Reserve rate hikes, supported by weak July jobs data, soft retail sales, and moderating inflation. However, analysts suggest interest rates will likely remain elevated compared to the post-2008 Financial Crisis period.

Key Drivers of Higher Rates:

• Policy Uncertainty: Fed Chair Kevin Warsh provides less forward guidance than predecessors, prompting investors to demand higher term premiums on long-dated bonds
• Treasury Supply: Federal budget deficit projected at $2.1 trillion for fiscal 2026 (up from $1.9 trillion), representing over 6% of GDP—historically unusual with low unemployment
• Corporate Issuance: AI-related debt issuance reached nearly $500 billion in 2026, with Morgan Stanley projecting full-year totals near $570 billion—more than double last year's pace

Market Implications:

The current rate environment mirrors 2000-2007 levels and remains below 1980s-1990s rates, suggesting today's rates represent a return to normalcy rather than an anomaly. The ultra-low rates following the Global Financial Crisis were the true outlier.

For fixed-income investors, elevated yields offer higher income potential and stronger total return foundations compared to the ultra-low-rate era. The AI infrastructure buildout presents near-term inflationary pressures before productivity gains materialize.

Investment Takeaway:

Higher starting yields create opportunities for income generation without relying solely on falling rates. The environment favors selective, active management across credit quality, maturity, and relative value considerations, potentially restoring fixed income's traditional portfolio role.

*Analysis provided by Shelton Capital Management, managing $7.8 billion in assets as of June 30, 2026.*