Why borrowing costs for nearly everything are surging, and what it means for you

This week has witnessed tumultuous swings in the bond market, causing distress among investors and reigniting concerns about an impending recession. This turbulence extends to fears regarding housing, the stability of banks, and even the fiscal sustainability of the U.S. government.

At the epicenter of this financial storm is the 10-year Treasury yield, a figure of immense influence and significance within the world of finance. The yield, representing the borrowing costs for bond issuers, has been on a relentless upward trajectory in recent weeks, surging to 4.8% on Tuesday—a level not witnessed since the brink of the 2008 financial crisis.

This surge in borrowing costs has exceeded the predictions of forecasters and has left Wall Street searching for explanations. Despite the Federal Reserve gradually raising its benchmark rate over the past 18 months, the impact had not been felt on longer-dated Treasurys like the 10-year until recently, largely due to prevailing beliefs among investors that rate cuts were imminent.

However, this perception began to shift in July, fueled by signs of unexpected economic strength defying expectations of a slowdown. The momentum escalated in recent weeks as Federal Reserve officials remained resolute in their stance that interest rates would remain elevated. Within Wall Street, various theories abound regarding the reasons behind this surge. Some speculate it to be technical in nature, potentially sparked by significant selling from a country or major institutions. Others are captivated by concerns surrounding the escalating U.S. deficit and political discord. There are even those who believe that the Federal Reserve deliberately orchestrated the yield surge to temper an overheated U.S. economy.

Bob Michele, the global head of fixed income for JPMorgan Chase’s asset management division, expressed, “The bond market is signaling that this higher cost of funding is here to stay for a while. It will persist because that’s where the Fed intends it to be. The Fed is deliberately slowing down you, the consumer.”

The 10-year Treasury yield holds a special place in the financial landscape due to its pivotal role in global finance. While shorter-duration Treasurys are directly influenced by Federal Reserve policy, the 10-year yield is shaped by market dynamics and reflects growth and inflation expectations. It stands as a critical factor for consumers, corporations, and governments, exerting influence over trillions of dollars in home and auto loans, corporate and municipal bonds, commercial paper, and currencies.

Ben Emons, the head of fixed income at NewEdge Wealth, emphasized its significance, stating, “When the 10-year yield moves, its impact reverberates across all sectors. It’s the paramount benchmark for rates, affecting anything related to corporate or individual financing.”