The 10-Year Treasury Yield Just Topped 5%, and That's a Warning for Every Small Business Loan

Economist David Stockman says Washington's debt trap is closing, and the bond market is already pricing it into the loans small businesses depend on.

The 10-year Treasury yield just moved back above 5.0%, and economist David Stockman says that number is the clearest sign yet that Washington is in a debt trap it cannot escape. If you run a small business and ever look at a loan rate, that yield is the one to watch, because it sets the floor under everything you borrow against.

Stockman, writing for International Man and carried by ZeroHedge, makes a point most people miss: both parties have spent almost the same share of the economy since Ronald Reagan took office. Republican administrations since 1980, Reagan, Bush, Bush, and Trump, have averaged 20.8% of GDP in federal spending. Democratic administrations averaged 21.1%. That is a 30 basis point gap. Before 1980, under Eisenhower, Nixon and Ford, GOP spending averaged 17.5% of GDP, a full 330 basis points lower than where Republican administrations sit today.

Why the Tax Cut Bet Never Paid Off

Stockman's explanation is that the GOP, starting with Art Laffer's influence on the Reagan White House, bet it could cut taxes and grow its way out of debt without ever having to cut spending. Milton Friedman had already told them the real number that mattered was not the tax rate, it was the spending share of GDP, because that share gets paid for one way or another, by taxing now or borrowing and paying interest later.

Stockman also points to the neoconservative wing, led by Irving and Bill Kristol, who told Republicans that cutting spending on seniors, veterans and farm programs was political suicide, what Irving Kristol called the 'root canal theory' of politics. Easier to just cut taxes and let both the welfare state and the military budget keep growing. That is roughly what happened for the next 45 years, and it is why the bond market is now charging 5% to hold the government's paper.

What a 5% Yield Does to a Contractor's Loan

In my insurance agency, I watch bond yields because insurers price risk and hold reserves against the same Treasury curve, so when that yield moves, it shows up eventually in premiums and in how carriers price risk. For a small business owner, the more direct hit is simpler: any variable rate loan, line of credit, or equipment lease gets more expensive to carry the moment the 10-year sits above 5%, on top of insurance, materials and payroll costs that are already squeezing margins.

My marketing company works with roofers, pressure washers and lawn care operators, and the first budget line that gets cut when capital gets expensive is marketing. Fewer ad dollars means fewer leads, which means a contractor hires more slowly or not at all. That is the real path from a bond market headline to a hiring decision on Main Street.

The Toll on Jobs, New Businesses and Household Income

For the job market, a higher-for-longer 10-year yield means the small businesses that do most of the hiring in this country finance expansion more slowly, so new positions come open at a slower pace. For someone thinking about starting a business, SBA loans and business lines of credit are priced off this same Treasury curve, so the cost of financing a truck, equipment or a buildout is higher than it was even a year ago, before a single sale is made.

For household income, Stockman's argument is that this gap between 17% of GDP in tax revenue and 21% of GDP in spending cannot run forever. It closes one of two ways: higher taxes, or inflation that quietly erodes what a paycheck buys. Either way, it is working people's income that absorbs the adjustment, not some abstract federal line item.

What to Watch Before Your Next Loan Decision

Here's my take: nobody in Washington is rushing to fix this, so plan as if the 10-year yield stays elevated.

• Check the 10-year Treasury yield before locking any business loan or line of credit. It drives the rate you're quoted.
• If you're borrowing to expand, favor a fixed rate over variable. Stockman's numbers argue this trend has room to keep running, not reverse.
• Build a cash cushion now rather than waiting on relief from either party. Neither has cut spending in 45 years, and nothing in this piece suggests that changes soon.