The Impact of Surging Treasury Yields on Borrowing Costs and the Economy

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By georgeskef

  • The yield on the 10-year Treasury bond reached its highest level since 2007, crossing the 5% mark.
  • Rising Treasury yields can lead to higher borrowing costs for homebuyers and small businesses.
  • Sky-high yields have contributed to increased mortgage rates, making homeownership more expensive than renting.
  • Some analysts believe that investors are selling off government debt due to concerns about the growing deficit.
  • Billionaire investor Bill Ackman’s comments about the economy may have halted the bond market sell-off.
  • The Federal Reserve’s future rate hikes may be influenced by the direction of bond yields.

On Monday morning trading, the yield on 10-year Treasury bonds broke above 5% for the first time since 2007. This unnerved investors, as it could mean higher borrowing costs for individuals and businesses alike.

Investors had anticipated an increase in Treasury yields since Jerome Powell took office, as investors anticipated that interest rates would be raised to counter persistent inflation. Given their use as a benchmark for other interest rates, such as mortgage rates, this sudden spike has contributed to skyrocketing mortgage rates that make homeownership 52% more expensive compared to renting. It may also explain why so many Americans struggle to meet car payments – now reaching its highest point since 1994.

Attributed to investors rushing to sell off 10-year bonds at lower prices due to supply and demand principles, investors rushed to sell off these investments resulting in cheaper prices as selling pressure increased; consequently this caused yields to rise since yields are directly proportional to prices.

Wall Street’s motivations for selling off Treasurys may vary widely, though traditionalists would likely point out it is seen as an indicator of economic health. On the other hand, some analysts contend investors may be selling because they perceive America to be fiscally irresponsible given its growing deficits.

Mental factors could also play a part in this decline. Billionaire investor Bill Ackman may be the single factor responsible for stopping the bond market sell-off; his comments that he had ended his bet on declining 30-year Treasury bond prices helped stop it; his concerns regarding global risk levels and economic health led 10-year bond yields to decrease to 4.85% by late afternoon.

Market participants continue to closely follow Jerome Powell and the Federal Reserve’s moves. Signs of an improving economy, which Ackman dismissed, has led some investors to anticipate further rate increases by the central bank. Conversely, excessively high Treasury bond yields could reduce further rate increases by slowing economic activity – ironic considering they can have an inhibiting effect on economic activity!

As previously discussed, rising Treasury yields on 10-year bonds have caused alarm among investors. While saving can benefit savers and provide an indication of economic confidence, any negative repercussions for borrowing costs and overall economic health should be carefully watched in the months to come. Market players will be closely following Federal Reserve actions as well as direction of bond yields closely in this market environment.