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

riskadjusted 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, 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 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 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 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 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

often gets labeled as the adult in the

room. But right now, while everyone's

distracted watching 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 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 Fed raises the

baseline rate to 5%, nobody wants an old

bond paying just 3%. 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 US 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.

Foreign central banks, pension funds,

sovereign wealth funds, the institutions

that used to reliably show up at

treasury auctions. If they start to

doubt that the US 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. Each

maturity sends a different signal about

the economy. The 2-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 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 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

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sponsoring this video. And now back to

the rate that's causing all the panic

right now. And that rate is called the

secured overnight financing rate or

sofur. You can think of it as the

overnight receipt for the entire US

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. And

in early 2022, sofur was effectively

zero. Then the Fed started hiking and by

mid 2023, sofur 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 rate

environment can do whatever it wants

afterward, 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 sofur, 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 sofur

moves, the interest rate on the loan

moves, too. Meaning, if sofur rises, the

borrower's interest on the debt rises.

And I think you can see where I'm going

with this. This is where the

consequences of rapidly rising rates

begin to show up. And to see where the

impact lands, we need to follow the

money a little further downstream to

private credit. 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. 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 loans value is appraised on a

predetermined schedule, usually once a

quarter. And we'll get more into why

this is so important later. The 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 this video. In 2021, a software

company called Pluralsight was acquired

by private equity firm Vista Equity

Partners. 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

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

Sofur, which was fine for about 3 years

because while Sofur was still near zero,

the math worked. But then Sofur went

from zero to over 5%. And suddenly

Pluralsight was underwater. And by

August 2024, it was over for

Pluralsight. Their interest payments

were 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 JP Morgan's

third quarter earnings call from 2025,

when CEO Jaime 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 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 than500

middle market private credit borrowers,

hit 6% 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

10fold since 2007. And like I mentioned

earlier, it's an industry where the

foundation is built on these floating

rate loans, which matters because

Pluralsight wasn't unique. It was just

one borrower in a massive stack. And

most of that stack is borrowing off

sofur, just like 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 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 pick. And it lets a borrower make

interest payments on a 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 sofur jumps from zero 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 PICSS 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 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 even

when there was actually no cash

received. And when the lenders, meaning

the private credit funds, enter into

these payment-in arrangements, they

report the unpaid interest as income.

Meaning the interest that was never

actually paid for in cash is counted as

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 insolveny shows up on the books

as a healthy income generating asset.

The interest it cannot pay 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 collected. And that's the

sneaky accounting. And it's been

spreading rapidly. Around 11 12% of

private credit loans now include pick

features, which is an increase of more

than 72% since the end of 2021. and more

than half of those were classified as

bad picks, 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

companies, PICSS 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 picks at more

than 14.5% of their total investment

income. And their non-acrrual loans,

meaning loans where borrowers have

stopped making payments entirely,

reached over 5%. And it's just like

Jaime Diamond said on that October

earnings call, when you see one

cockroach, there 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 involve

the introduction of payment inind

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

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 three, which is the most illquid

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. And MSCI recently found

that more than 10% of private credit

loans were already marked down by at

least 50 cents on the dollar. And that's

how a title 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 read about it

afterward, subscribe because this story

is still in the early innings and I'll

be covering it closely as it 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.

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