PITTSFIELD, Mass. — Over the last month, equity investors have grown concerned with the rapid rise in U.S. Treasury bond yields.

Higher interest rates should spell danger for stocks. And yet, equities are still less than 2 percent from all-time highs. What gives?

Many financial experts say bond yields are rising because of oil prices, inflation, out-of-control government spending, Trump tariffs, and anticipation of Fed rate hikes. What if the explanation was much simpler? Could higher bond yields simply reflect a stronger growth economy?

This isn’t a new concept. The higher growth/yield correlation occurred in 1994, 2009, and 2012. In fact, financial history is rife with similar correlations. The underlying dynamics are straightforward. When the economy grows more rapidly than expected, consumer spending and business investment increase, as does the stock market. That’s a good thing if it doesn’t contribute to higher inflation.

To prevent the economy from overheating and triggering more inflation, central banks often raise interest rates to make borrowing more expensive. As readers know, the U.S. Federal Reserve Bank has begun an interest rate tightening cycle at its September meeting. The odds that they will tighten again in October have come down. It is perfectly natural for bond yields to rise in anticipation of a hiking cycle.

That is exactly what at least one eminent Fed president sees in this recent climb in bond yields. I caught a CNBC interview with New York Fed President John Williams, a permanent voting member of the rate-setting Federal Open Market Committee, last Wednesday. He remains in the wait-and-see camp among Fed Heads, while others are clamoring for more hikes.

On Tuesday, in prepared remarks, he said, "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information."

Williams is one of those Fed figures I pay attention to because he has a great deal of experience in the financial markets and keeps his cool when others don’t. When asked about yields, he said, "What’s driving it, in large part, is a really strong economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general."

Williams laid out his base case for interest rates when he said: "If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target."

One way to see whether inflation or growth is driving the climb in bond yields is to determine which has moved more: real yields (nominal rates minus the inflation rate) or inflation expectations. Real yields reflect the market’s expectations of the economy's underlying strength. It is usually measured by looking at the rates on U.S. inflation-protected U.S. Treasuries called TIPS.

To see how much of a yield move is driven by inflation expectations, you measure the difference between TIPS yields and those of regular Treasury securities maturing around the same time. The gap between the two should give us an idea of what investors think the inflation rate will be during that time.

Axios Markets, a well-respected financial newsletter, crunched the numbers and discovered that over the last month the five-year real yield accounted for 0.72 percentage points in the rise in the five-year Treasury note. Inflation expectations only accounted for 0.06 percentage points of the move. Some may find that hard to believe.

Yes, I'm aware of all the consternation around the economy's inflation, but there are compelling reasons to believe the yield spike is a growth story. Second-quarter Gross Domestic Product was revised up to a 2.2 percent annualized growth rate from the previously reported 1.5 percent.

Consumer spending grew at a healthy 3.8 percent annualized pace, while stronger business investment contributed to the revision. Consider that the artificial intelligence revolution has sparked the largest capital investment boom in American history. Goldman Sachs analysts project AI spending will reach $1.3 trillion in 2027 and $2 trillion in 2028, in addition to the trillions of dollars already spent. As a result, corporate profits have grown between 20 percent and almost 30 percent per quarter for the last few quarters. The unemployment rate is at 60-year lows. That is a heck of a case for the growth/yield story.

Granted. For the ordinary worker, struggling with mounting energy bills, affordability issues, and the like, it certainly doesn’t feel like growth. In fact, American laborers are receiving the smallest share of income from these economic benefits in our nation's history. Of course, every two years, these same workers can change that equation if they so choose through the ballot box. Recently, they have chosen not to.

It's as if the world is against homebuilding. As mortgage rates top 7 percent, a combination of higher prices for key inputs, thanks to tariffs and the Iran war, has already decimated the sector. And yet, there is worse news for builders. ICE-inflicted labor shortages are suffocating profits and growth.

From the East to the West Coast, home builders are complaining bitterly about the administration's current immigration enforcement efforts. This year, ICE's efforts to redouble its arrests at the insistence of the White House have resulted in a surge of arrests of "illegal aliens."

And while the numbers may satisfy some in the country, they are causing consternation among the nation's homebuilders. A survey by John Burns Research and Consulting, which tracks market trends in the industry, found that the administration's immigration actions are causing severe labor shortages. This worker shortfall is driving up costs and delaying cycle times for new home construction.

Three straight months of record arrests this summer have convinced many legally authorized workers across the housing sector to stop showing up for work. Many fear that despite their legal status, if they are caught up in an ICE sweep, they could be easily deported or spend months in detention and incur huge legal fees before their status can be adjudicated.

They point to the fact that in recent months, ICE has coordinated with immigration courts to dismiss many noncitizen removal cases and immediately arrest individuals so they can be processed for expedited removal. As a result, a noncitizen but legal immigrant has little opportunity to contest or seek other relief if caught up in an ICE sweep at a construction site or factory.

Overall, immigrants comprise more than 26 percent of the construction workforce in the U.S., although that share can be even higher depending on the trade. Those in drywalling, ceiling installation, plastering, stucco masonry, roofing, painting, paper hanging, and carpet, floor, and tile installations account for more than 50 percent of workers in construction trades.

This shortage is nothing new. In a landmark 2025 study by the Home Builders Institute, the National Association of Home Builders, and the University of Denver, the study found that the skilled labor shortage in the single-family home building sector is costing the U.S. economy around $19 billion a year.

The AI boom in private data center construction has also siphoned off a swath of the existing labor pool. Through July of this year, $37 billion was spent on AI data center construction compared to $46 billion for construction of everything else, from houses, apartments, shopping centers, etc.

Add the 6.7 percent increase in building material costs, driven by tariffs and conflict-driven inflation, and you have a pretty good idea why your children can't afford to buy a home in America today.

Readers may recall that Donald Trump's immigration policies were intended to remove "Tens of Millions of Illegal Alien Criminals who poured into our country, including Hundreds of Thousands of Convicted Murderers, Rapists, Kidnappers, Drug Dealers, and Terrorists," according to a January 25th social media post by the president.

It is notoriously difficult to determine exactly how many arrests and deportations of criminal illegal immigrants have been accomplished. That alone should tell you something about the government's success rate of capturing criminal illegals. If you have a documented number, I would be grateful to know it.

As of the end of the government's 2025 fiscal year, the Cato Institute found that 73 percent of arrested illegals had no criminal record. Other news sources say less than one-third have any criminal conviction. I guess one can argue, as this administration must surely be doing, that because someone crossed into this country illegally, they are a criminal by definition.

I'm equally sure that few who may have agreed with the president's social media post (quoted above) would consider their nanny, hospital attendant, roofer, house painter, fruit picker or grass cutter fit Trump's definition of a criminal. It appears that those red-blooded Americans who build houses for a living (many of whom reside in Red States) are becoming increasingly dissatisfied with the present immigration policies of the United States. How about you?

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill's forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. None of his commentary is or should be considered investment advice. Direct your inquiries to his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal.