Violent in the bond market this week have hammered investors and renewed fears of a recession, as well as concerns about housing, banks and even the fiscal sustainability of the U.S. government.
At the center of the storm is the 10-year Treasury , one of the most influential numbers in finance. The yield, which represents borrowing costs for issuers of bonds, has climbed steadily in recent weeks and reached 4.88% on Tuesday, a level just before the 2008 financial crisis.
The relentless rise in borrowing costs has blown past forecasters' predictions and has Wall Street casting about for explanations. While the has been raising its benchmark rate for 18 months, that hasn't impacted longer-dated Treasurys like the 10-year until recently as investors believed rate cuts were likely coming in the near term.
That began to change in with signs of economic strength defying expectations for a slowdown. It gained speed in recent weeks as Fed officials remained steadfast that interest rates will remain elevated. Some on Wall Street believe that part of the move is technical in nature, sparked by selling from a country or large institutions. Others are fixated on the spiraling U.S. deficit and political dysfunction. Still others are convinced that the Fed has intentionally caused the surge in yields to slow down a too-hot U.S. economy.
"The bond market is telling us that this higher cost of funding is going to be with us for a while," , global head of fixed income for 's asset management division, said Tuesday in a Zoom interview. "It's going to stay there because that's where the Fed wants it. The Fed is slowing you, the consumer, down."
Investors are fixated on the 10-year Treasury yield because of its in global finance.
While shorter-duration Treasurys are more directly moved by Fed policy, the 10-year is influenced by the market and reflects expectations for growth and inflation. It's the rate that matters most to consumers, corporations and governments, influencing trillions of dollars in home and auto , corporate and municipal bonds, commercial paper, and currencies.
"When the 10-year moves, it affects everything; it's the most watched benchmark for rates," said , head of fixed income at NewEdge Wealth. "It impacts anything that's financing for corporates or people."
The yield's recent moves have the stock market on a razor's edge as some of the expected correlations between asset classes have broken down.
Stocks have sold off since yields began rising in July, giving up much of the year's gains, but the typical safe haven of U.S. Treasurys has fared even worse. Longer-dated bonds have lost 46% since a March 2020 peak, according to Bloomberg, a precipitous decline for what's supposed to be one of the safest investments available.
"You have equities falling like it's a recession, rates climbing like growth has no bounds, gold selling off like inflation is dead," said , a former hedge fund chief risk officer who now runs consultancy Alpha Theory Advisors. "None of it makes sense." '
But beyond investors, the impact on most Americans is yet to come, especially if rates continue their climb.
That's because the rise in long-term yields is helping the Fed in its fight against inflation. By tightening financial conditions and lowering asset prices, demand should ease as more Americans cut back on spending or lose their jobs. Credit card borrowing has increased as consumers spend down their excess savings, and delinquencies are at their since began.
"People have to borrow at a much higher rate than they would have a month ago, two months ago, six months ago," said , head of multi sector investing at asset and wealth management.
"Unfortunately, I do think there has to be some pain for the average American now," she said.
Beyond the consumer, that could be felt as employers pull back from what has been a strong economy. Companies that can only issue debt in the high-yield market, which includes many retail employers, will confront sharply higher borrowing costs. Higher rates and push commercial real estate closer to default.
"For anyone with debt coming due, this is a rate shock," said of Bleakley Financial Group. "Any real estate person who has a loan coming due, any business whose floating rate loan is due, this is tough."
The spike in yields also adds pressure to regional banks holding bonds that have fallen in value, one of the key factors in the failures of Silicon Valley Bank and . While analysts don't expect more banks to collapse, the industry has been seeking to offload assets and has already pulled back on lending.
"We are now 100 basis points higher in yield" than in March, Rosner said. "So if banks haven't fixed their issues since then, the problem is only worse, because rates are only higher."
The rise in the 10-year paused at midweek and picked up Friday, after a much stronger than expected . The yield 11 basis points to 4.83%.
But after piercing through previous resistance levels, many expect that yields can , since the factors believed to be driving yields are still in place.
That has raised fears that the U.S. could face a where higher rates and spiraling deficits become entrenched, a concern boosted by the possibility of a government shutdown .
"There are real concerns of 'Are we operating at a debt-to-GDP level that is untenable?'" Rosner said.
Since the Fed began raising rates last year, there have been two episodes of financial turmoil: the September 2022 in the U.K.'s government bonds and the March U.S. regional .
Another move higher in the 10-year yield from here would heighten the chances breaks and makes recession much more likely, JPMorgan's Michele said.
"If we get over 5% in the long end, this is legitimately another rate shock," Michele said. "At that point, you have to keep your eyes open for whatever looks frail."
