After climbing rapidly in recent weeks, the yield of 10-year US treasury bond bonds hit 5% on Monday, the first time in 16 years. At a time when the US economy is showing astonishing resilience, this is one of several borrowing cost indicators that may drag down the economy, including other long-term government bonds, home mortgages, credit cards, car loans, and commercial loan costs.
In addition to rising interest rates, the US economy also faces other potential obstacles, including the Middle East conflict that could push up energy prices, ongoing strikes that could lead to more unemployment, and the possibility of a partial government shutdown next month.
At the same time, against the backdrop of the federal budget deficit and expanding debt, rising yields have also raised the borrowing costs of the US government.
Despite the Federal Reserve significantly raising short-term interest rates to combat inflation by cooling economic activity, the US economy has remained strong over the past year. If long-term interest rates continue to rise, it may increase the risk of the economy falling into a broader and deeper recession, rather than the expected soft landing, where inflation cools down without a recession.
The market is concerned that rising yields will have unexpected consequences, "said Roger Aliaga D í az, Chief Economist for Vanguard Americas. We still believe that in terms of the possibility of economic recession, we have not safely landed yet
Higher interest rates may suppress consumer spending, which has been driving economic growth along with a strong job market since the beginning of this year. According to data from the US Department of Labor, the number of jobs in the United States surged in September, while the unemployment rate remained at a historic low. Another data shows that the summer shopping frenzy among Americans continued until September.
According to the Federal Reserve Bank of Atlanta, driven by this, the US economy will grow by over 5% year-on-year in the summer. Economists surveyed by The Wall Street Journal this month expect economic growth to sharply slow to around 0.9% in the current quarter.
Consumers also face the recovery of federal student loans and higher prices than before the COVID-19 epidemic.
In this situation, consumer spending will not be stronger, but more cautious, "said Gregory Daco, chief economist at EY Parthenon.
He predicts that retail sales for the holiday season from November to December this year will increase by 3% compared to the same period last year, slowing down from the same period in 2022 and lagging behind recent inflation rates. He now believes that the probability of a US economic recession in the next 12 months is about 50%, higher than the 40% before the surge in long-term returns.
He said that a sudden increase in long-term bond yields could also trigger financial market turmoil.
The rise in interest rates may lead to further strengthening of the US dollar, making American exporters' products more expensive in the global market, thereby harming their interests.
In terms of housing, the rise in mortgage rates has added to the already sluggish market.
Lisa Sturtevant, Chief Economist at BrightMLS, said that a mortgage interest rate of nearly 8% creates a "new psychological threshold" for potential homebuyers.
She said, 'To be honest, these numbers will no longer play a role for people,' because mortgage rates and high housing prices have caused many people to be unable to afford a house. The slowdown in residential investment and the purchase of related items such as furniture will suppress overall economic growth.
To be sure, the rise in long-term US treasury bond bond yields may slow or reverse. Vanguard's Aliaga Diaz said, "The higher the yield, the more likely it is to fall in the next step
Continued high yields may also put pressure on the federal budget. According to the data of the US Treasury Department, in the last fiscal year ended September 30, the federal expenditure on treasury bond bond interest increased by $162 billion year-on-year. This number exceeds the respective growth rates of Medicare, Medicaid, and Social Security expenditures in the United States.
The Congressional Budget Office of the United States predicts that by 2053, the ratio of federal debt service costs to GDP will more than double, reaching 6.7%. These forecasts are based on the premise that the yield of the 10-year US treasury bond bond will average 3.8% in 2033 and 4.5% in 2053.
If interest rates continue to rise for a long time, it could be catastrophic for the federal budget, "said Brian Riedl, a senior researcher at the Manhattan Institute and former Republican congressional staff member
The increase in bond yields will gradually increase the borrowing cost for the US government, as the Treasury Department will roll over debt previously issued at lower interest rates. According to data from the Ministry of Finance, the weighted average interest rate paid by the federal government for all debts in August was 2.92%. But more than half of the US treasury bond will mature within three years, which means that the yield of treasury bond is expected to rise further over time.
Alec Phillips, Chief Political Economist at Goldman Sachs, said that after adjusting for inflation, the level of concern about the cost of US government interest expenses will decrease. He said that considering the size of the US economy, the affordability of actual net interest expenses will increase.
At the same time, the US government may have to continue to increase its borrowing scale. If adjusted according to the student loan repayment exemption plan, the US government's deficit significantly increased in the just ended fiscal year. The US Treasury Department's statement in July this year that it will gradually increase the auction size of bills and bonds surprised investors.
Borrowing more debt may lead to an increase in interest rates, potentially creating a vicious cycle of debt. Riedl said, "All of this boils down to the fact that at some point, the bond market will begin to cut off financing to the US government, at least at a reasonable interest rate level
Wendy Edelberg, former Chief Economist of the Congressional Budget Office, said that higher interest expenses will ultimately force policymakers to choose whether to accept higher borrowing costs, raise taxes, or cut spending. She said that using more funds to repay old debts would suppress private investment, but it may not necessarily trigger a crisis.
Edelberg said, "We need to decide what we believe is the most effective way to finance these interest costs