about 1 month ago • 2 mins
The 10-year Treasury yield briefly crossed above 5% for the first time in 16 years on Monday as investors continued to dump bonds en masse, sending their prices lower and forcing their yields higher. This rout has been going on for weeks, fueled by expectations that the Federal Reserve will keep interest rates at their current high levels for longer and that the US government will have to sell even more bonds to cover its widening budget shortfall. In fact, concerns over the government’s near $2 trillion annual budget deficit prompted Fitch Ratings to downgrade the US’s credit rating in August, adding upward pressure to yields. With the latest selloff, the prices of Treasuries with maturities of 10 years or longer have now declined by nearly 50% since their March 2020 peak, putting them on course for an unprecedented third year of annual losses.
But it’s not just bond investors that’ll be feeling the pain: the 10-year Treasury yield is often considered “the risk-free rate” against which all other investments are benchmarked. So a higher yield could lead to declining values in other asset classes too. What’s more, the yield impacts borrowing rates for households and businesses. The average rate on a 30-year fixed mortgage, for example, soared to around 8% in recent weeks as a result, while the cost of servicing credit card bills, student loans, and other debts has also climbed. The big concern now is that these elevated borrowing costs, which are already hindering the US economy's momentum, could dent consumer spending and business investment enough to bring about a recession.
In the long run, yields might exceed recent historical levels. A recent study by Bloomberg Economics, for example, suggests that the cumulative effects of persistently heavy government borrowing, increased spending on climate change initiatives, and accelerated economic growth could result in a nominal 10-year bond yield around 6%.
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