about 1 month ago • 2 mins
If you thought the US economy would be in worse shape by now – banged up by the rapid rise in Treasury yields – you’re far from alone. That’s what usually happens, after all. Generally, when there’s a sharp increase in bond yields, a downturn isn’t far behind.
Just look where we are: over the past three years, the 10-year Treasury yield, which serves as a benchmark for the cost of money across the financial system, has climbed more than four percentage points. Earlier this month, it popped above 5% for the first time in 16 years. We haven’t seen this kind of escalation in yields since the early 1980s when efforts to combat inflation (sound familiar?) drove rates up and plunged the US into back-to-back recessions.
Of course, interest rates in those days were even higher than they are now: adjusted for inflation, the real 10-year Treasury yield stood near 4% as the second downturn began in mid-1981. Right now, it’s about 1%, but that’s widely expected to nudge upward as inflation continues to fall and as bond yields ascend.
See, the Federal Reserve may not have a lot of options here. With the unexpected strength of the US job market and the overall economy, the Fed (whose job it is to keep inflation low and employment high) will likely have to keep interest rates elevated for a while, maintaining that upward pressure on bond yields. The government’s ballooning budget deficit, meanwhile, is likely to continue flooding the market with new Treasuries at a time when its biggest buyers – the Fed and other major central banks – are backing away from the till.
So while history tells us that a rapid rise in Treasury yields is ample reason to be cautious, the current resilience of the US economy offers a contrasting narrative. It remains to be seen whether the economy can sustain its momentum in the face of mounting pressures or if history will once again repeat itself.
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