The yields on a 10-year treasury has reached 5% for the first time since 2007. Yields have jumped since they were at .50% early in the pandemic, reflecting a significant shift in financial markets and impacting consumer and corporate borrowing costs.
As the financial world reels from these changes, we begin to understand their magnitude through various indicators. According to a news article on The Independent, treasury yields have risen significantly, with the 10-year yield at 4.96%, a significant increase from less than 3.50% during the spring and 0.50% early in the pandemic. This means the US government must pay more to borrow money from investors to cover its spending. The 10-year Treasury yield is the centerpiece of the global financial system and sets prices for loans and investments. Higher yields make it more expensive for US homebuyers to buy a house with a mortgage, put downward pressure on prices for stocks and cryptocurrencies, and could cause companies to lay off more workers. This marks a sharp turnaround for a generation of consumers and investors who have experienced low yields, which helped economies strengthen following the 2008 financial crisis and the European debt crisis.
Moving beyond immediate impacts, let's examine how this shift affects other economic sectors. According to the same article, The Federal Reserve's main interest rate, which affects short-term loans, has been catching up to The Fed's main interest rate, signaling plans to keep rates high for a while to effectively suffocate inflation. The 10-year Treasury yield has been catching up to The Fed's main interest rate, easing concerns about a possible recession caused by high rates. Factors contributing to the rise in the 10-year Treasury yield include US government's large deficits which require more federal borrowing, and The Fed's efforts to reduce its bond investments. Bond prices have also been falling in tandem with stock prices causing investors to demand higher yields. The rise in the 10-year Treasury yield directly means the US government has to pay more to borrow money for 10 years but it also filters out into all types of loans. Borrowers with worse credit ratings have to pay more extra to repay their debts.
With these wide-ranging effects in view, we can now consider how global financial markets are reacting. The 10-year Treasury's yield, considered one of the safest investments globally, has significantly impacted investment prices. As a result, investors are less willing to pay high prices for riskier investments like Big Tech stocks or cryptocurrency. This has led to a decline in the S&P 500's gain from 19.5% to 10%. Higher US yields also attract foreign investments leading to increased currency swaps for US dollars. This can help US tourists buy more abroad but also add financial pressure and heighten inflation in developing countries. Additionally, the rise in bond yields has led losses for US bond investors as older, lower-yielding bonds become less attractive. The largest US bond mutual fund has lost 3% so far in 2023.
