WASHINGTON, September 24 — The 10-year US Treasury yield has pushed above 4.5%, its highest since 2007, extending a months-long bond selloff that has lifted borrowing costs across the world’s largest economy. The bottom line: the benchmark rate that anchors everything from mortgages to corporate debt is back at levels not seen in more than a decade and a half, and it is still climbing. By the numbers, Monday’s move carried the 10-year note past 4.5%.
The 30-year Treasury yield topped 4.6%, and the 2-year yield — the maturity most sensitive to Federal Reserve policy expectations — reached multi-year highs above 5.1%.
What is driving the selloff
The surge extends a months-long bond selloff driven by a combination of stronger-than-expected US economic data, persistent inflation, and the Fed’s commitment to keeping interest rates higher for longer. The Fed has raised its benchmark federal funds rate 11 times since March 2022, bringing it to a target range of 5.25% to 5.5% — the highest level in 22 years.
At its September 2023 meeting, the central bank left rates unchanged but signaled one more hike could come before the end of 2023 and that rates would likely stay elevated through 2024. Fed Chair Jerome Powell has repeatedly said the central bank is prepared to raise rates further if needed to bring inflation down to its 2% goal.
Inflation, as measured by the Consumer Price Index, was 3.7% in August 2023 on a year-over-year basis. That is down from a peak of 9.1% in June 2022 but still well above the Fed’s target.
Mortgages, stocks and the housing market
The 10-year Treasury yield is a critical benchmark. It influences mortgage rates, corporate borrowing costs, and stock valuations. The average 30-year fixed mortgage rate has risen above 7.3%, according to Freddie Mac — the highest since 2000.
That has cooled the housing market. Existing home sales fell to a seasonally adjusted annual rate of 4.04 million in August 2023, down 15.3% from a year earlier, according to the National Association of Realtors.
Higher yields also pressure stock prices, particularly for technology and growth companies whose future earnings are discounted more heavily. The S&P 500 has fallen about 5% from its 2023 high in July, while the Nasdaq Composite has dropped more than 7% from its July peak.
The government’s own borrowing bill
Rising Treasury yields raise the US government’s borrowing costs too. The federal budget deficit for fiscal year 2023, which ended September 30, was $1.7 trillion, according to the Treasury Department, up from $1.375 trillion in fiscal 2022. Interest payments on the national debt have surged.
The Congressional Budget Office projects net interest costs will reach $663 billion in fiscal 2023 and exceed $1 trillion annually by 2033. The national debt stands at over $33 trillion.
A key driver of the recent yield surge is the so-called term premium, the extra compensation investors demand for holding longer-term bonds. The Federal Reserve has also been shrinking its balance sheet, a process known as quantitative tightening, which reduces demand for Treasuries. At the same time, the supply of new Treasury issuance has increased as the government funds its deficit, putting further upward pressure on yields.
The curve, the economy and what comes next
The yield curve, which had been deeply inverted for months, with short-term rates above long-term rates, has begun to steepen as long-term yields rise faster than short-term ones. An inverted yield curve has historically been a reliable predictor of recessions, though the US economy has remained resilient so far. GDP grew at a 2.1% annualized rate in the second quarter of 2023, and the unemployment rate was 3.8% in August 2023.
Economists warn that if yields continue to rise, they could tip the economy into a downturn by making borrowing more expensive for businesses and consumers. Higher yields also attract global capital to the US, strengthening the dollar, which can hurt US exporters and emerging market economies.
Investors will note that the story is still developing. Market participants are watching upcoming economic data and Fed communications for clues about the future path of interest rates.
