Why borrowing costs for nearly everything are surging

This week’s wild swings in the bond market have hurt investors, renewed fears of a recession and heightened concerns about housing, banks and even the U.S. government’s fiscal sustainability.

At the center of the storm is one of the most influential numbers in the financial world: the 10-year Treasury yield. Yields, which measure the cost of borrowing for bond issuers, have risen steadily in recent weeks and hit 4.8% on Tuesday, a level recorded just before the 2008 financial crisis.

The relentless rise in borrowing costs has defied forecasters and left Wall Street demanding an explanation. The Fed has been raising benchmark interest rates for 18 months, but until recently long-term Treasuries like the 10-year were unaffected because investors believed a rate cut was likely in the near future.

That started to change, July There are signs of economic strength that is overturning predictions of an economic slowdown. The move has accelerated in recent weeks as Fed officials remain firm in their view that interest rates will remain high. Some on Wall Street believe some of this movement is technical in nature, driven by sales pitches from countries and large institutions. Others are fixated on the worsening US budget deficit and dysfunctional politics. Still others are convinced that the Fed intentionally caused yields to spike in order to slow down an overheated U.S. economy.

“The bond market is telling us that these rising funding costs will continue for some time.” bob michelJPMorgan Chase’s global head of fixed income, asset management, said in a Zoom interview Tuesday. “The status quo will remain because the Fed wants it to. The Fed is slowing you down, the consumer.”

Investors are obsessed with the yield on the 10-year Treasury note. Superiority in the field of global finance.

Short-term Treasuries are directly influenced by Fed policy, while 10-year Treasuries are influenced by the market and reflect expectations for growth and inflation. This is the most important interest rate for consumers, businesses, and governments, impacting trillions of dollars in homes and cars. loancorporate and municipal bonds, commercial paper, currency, etc.

He said, “When the 10-year period moves, it affects everything.It is the most watched interest rate benchmark.” ben emmons, head of fixed income at NewEdge Wealth. “It’s something that impacts the way businesses and individuals raise money.”

Recent yield movements have put the stock market in jeopardy as some of the expected correlations between asset classes have broken down.

Since yields started rising in July, stocks have been sold off, giving up much of this year’s gains, but the situation for U.S. Treasuries, a typical safe-haven asset, has gotten even worse. According to Bloomberg, long-term bonds are down 46% from their peak in March 2020, a sharp decline for a bond that is supposed to be one of the safest investments available.

“Stock prices will fall as if there is a recession, interest rates will rise as if there is no limit to growth, and gold will be sold as if inflation is over.” benjamin dunn, a former hedge fund chief risk officer who now runs the consulting firm Alpha Theory Advisors. “None of it makes any sense.”‘

But beyond investors, the impact on most Americans is yet to come, especially if interest rates continue to rise.

This is because rising long-term interest rates are helping the Fed combat inflation. Tightening financial conditions and lowering asset prices should ease demand as more Americans cut spending or lose their jobs. As consumers draw down their surplus savings, credit card borrowing has increased, pushing delinquency rates to a breaking point. the best Since the start of the new coronavirus pandemic,

“People are having to borrow at much higher interest rates than they were a month ago, two months ago, six months ago,” he said. lindsey rosnerHead of Multi-Sector Investments at Goldman Sachs Asset & Wealth Management.

“Unfortunately, I think there has to be some level of pain for the average American right now,” she said.

Beyond consumers, that may be felt as employers withdraw from a previously strong economy. Companies that can only issue debt in high-yield markets, including many retail employers, will face sharp increases in borrowing costs. Rising interest rates will squeeze the housing industry and push commercial real estate closer to default.

“This is an interest rate shock for people who have debt that is coming due,” said Peter Boockvar of Bleakley Financial Group. “This is tough for real estate professionals with loans coming due and businesses with variable rate loans coming due.”

Rising yields are also putting pressure on local banks that hold bonds that have fallen in value, a key factor in the failures of Silicon Valley Bank and First Republic. Analysts don’t expect more banks to fail, but the industry is already scaling back lending as it looks to sell assets.

“Yields are now 100 basis points higher than they were in March,” Rosner said. “So if banks haven’t fixed the problem since then, the problem will only get worse because interest rates will only go up.”

The 10-year bond has stopped rising in the past two sessions this week. The rate was 4.71% on Thursday, ahead of Friday’s key employment report. However, after breaking through previous resistance, many expect yields to rise further as the factors that are believed to be pushing them up remain in place.

This has fueled fears that the U.S. could face a debt crisis due to rising interest rates and a surging budget deficit, concerns further heightened by the possibility of a government shutdown. next month.

“There are real concerns about, ‘Are we operating at an unsustainable debt-to-GDP level?'” Rozner said.

Since the Fed began raising interest rates last year, two financial turmoil have occurred: the UK government bond crash in September 2022 and the US regional bank crisis in March.

JPMorgan’s Michel said that if the 10-year Treasury yield rises further from here, the chances of something breaking would increase, making a recession even more likely.

“If we get above 5% in the long run, this is obviously going to be another interest rate shock,” Michel said. “At that point, you have to keep an eye on what looks weak.”