The yield on the 10-year Treasury note briefly eclipsed 5% this week amid signs that the Federal Reserve might end up keeping interest rates high for longer, portending higher borrowing costs for the federal government and for households.
Benchmark 10-year Treasury yields briefly reached as high as 5.029% this week, up about 1.2 percentage points from July alone. That is the highest the yield has been since 2007, just before the onset of the Great Recession.
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As of Friday, the yield had moderated a bit, falling to about 4.93%. Meanwhile, yields on the 30-year Treasury rose as high as 5.14%. The benchmark two-year Treasury yield reached 5.16% before retreating a bit as well.
The yield on the 10-year Treasury is seen as a sort of barometer for interest rates, and it going up even more is bad news for consumers who are already struggling under the weight of still-too-high inflation.
Mark Hamrick, Bankrate’s senior economic analyst, emphasized to the Washington Examiner on Friday that the markets themselves dictate a lot of things for consumers and that the higher yields aren’t just something on paper but rather have a profound effect on the economic landscape.
“Those have huge impacts on the economy, and one of the impacts that is being felt in a seismic fashion right now is that the 10-year Treasury is the basis for the 30-year fixed-rate mortgage … which is now at the highest level since the year 2000,” Hamrick explained.
Consumers have been suffering under the pressure of soaring mortgage rates since the Fed began hiking its interest rate target in March of last year. Right now, the Fed's target rate is set at 5.25% to 5.50%, the highest it has been since the dot-com bubble of the early 2000s.
The median monthly mortgage payment is now more than double what it was in 2020.
This week, the average rate on a 30-year, fixed-rate mortgage rose as high as 8.03%, according to Mortgage News Daily, which tracks daily changes in rates. That is more than two percentage points higher than the 30-year rate was in February. The last time rates passed 8% was in 2000, according to separate records maintained by Freddie Mac.
The higher mortgage rates are reverberating all throughout the housing ecosystem, imperiling the country’s surprisingly robust labor market and positive gross domestic product growth.
“The recent run-up in mortgage rates is nudging the housing market back toward recession,” Wells Fargo economists said in a note this week. “Existing home sales in September sank to their slowest pace since 2010. Single-family building has been more resilient; however, builders are growing less confident in their ability to sustain sales.”
But higher Treasury yields are being felt in other places than just the housing market. In a broader sense, yields are flashing warning signs of a potential broad-based economic recession.
“Higher yields have a way of slowing the economy,” Hamrick said.
The yields of the 10-year and two-year Treasurys are also inverted and have been for a while, meaning the shorter-term yields are higher than longer-term yields. Yield curve inversions can foreshadow recessions, as they suggest investors have little faith in growth picking up in the coming years.
Higher yields on Treasurys are also not good news for the stock market as bond yields, and the stock market tend to move in opposite directions.
“For investors, obviously, it makes the investing climate more challenging, and people are looking at things now like cash given the fact that the savings rates are as favorable as they are,” Hamrick said.
This trading week, amid the historically rising yields, the S&P 500 shed more than 2% of its total value, the Dow Jones Industrial Average dropped about 1.6%, and the tech-heavy Nasdaq’s losses were approaching 2.8%. The S&P 500, which closely tracks the overall stock market, is also down nearly 3.5% over the past month.
It is still unclear whether the stock market, which has performed surprisingly well over the last year given the high-interest-rate environment, will keep holding up as the year comes to a close.
“Simply put, can the equity market continue its climb higher during this traditionally hospitable seasonal period if the 10-year Treasury yield remains — and even climbs above — 5%,” wondered Quincy Krosby, chief global strategist for LPL Financial. “The equation is going to be tested, and perhaps stronger earnings and guidance will counteract the negative effect on the market.”
Fed Chairman Jerome Powell provided a bit of relief on Thursday when he delivered a key policy speech during an event at the Economic Club of New York. He hinted that the central bank would not raise rates again at its next two-day meeting, which starts at the end of the month.
Still, Powell didn’t rule out more rate revisions into next year should inflation prove to be too sticky.
“Given the uncertainties and risks and how far we have come, the committee is proceeding carefully,” Powell said. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
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The prevailing notion about investors, though, is that the Fed will, at the very least, at least keep the Fed's target rate at its currently high level for longer than previously thought.
“I think we can associate ourselves with a notion that the Federal Reserve has embraced, and that is not necessarily higher, but high for longer,” Hamrick said.