Borrowing Costs Surge Across the Board, Squeezing Consumers and Businesses Alike

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The 10-year Treasury yield, one of the most closely watched interest rates in global finance, has been steadily climbing over the past few weeks and hit 4.8% on Tuesday October 4, reaching levels not seen since the 2008 financial crisis.

This relentless rise in borrowing costs has taken Wall Street by surprise, blowing past most forecasters’ predictions. It signals that the era of cheap money fueled by low interest rates is well and truly over.

Why the 10-Year Treasury Matters

While the Federal Reserve directly controls short-term rates through its federal funds rate, the 10-year Treasury yield reflects market expectations for economic growth and inflation over the next decade. It heavily influences borrowing costs economy-wide.

“When the 10-year moves, it affects everything; it’s the most watched benchmark for rates,” said Ben Emons, head of fixed income at NewEdge Wealth. “It impacts anything that’s financing for corporates or people.”

From auto and home loans, to corporate and municipal bonds, to commercial paper and currencies, the 10-year Treasury yield sets the tone for trillions of dollars worth of lending. It is the closest thing to an “everything rate.”

So when it rises sharply, it reverberates across the economy, making borrowing more expensive for consumers and companies alike.

The Fed’s Fight Against Inflation

According to Bob Michele, global head of fixed income for JPMorgan Chase’s asset management arm, the surge in the 10-year Treasury yield is being driven primarily by the Federal Reserve’s aggressive interest rate hikes aimed at taming inflation.

The central bank has raised its benchmark federal funds rate by 3 percentage points this year, taking it from near zero to a range of 3% to 3.25% currently. But until recently, longer-term rates like the 10-year yield had remained low on expectations the Fed would pivot to rate cuts fairly soon.

That investor mindset has now changed dramatically, with markets betting on elevated rates for years to come.

“The bond market is telling us that this higher cost of funding is going to be with us for a while,” Michele said. “It’s going to stay there because that’s where the Fed wants it. The Fed is slowing you, the consumer, down.”

By tightening financial conditions and making borrowing more expensive across the board, the aim is to cool demand and rein in inflation that has been hovering near 40-year highs.

So in effect, the surge in long-term yields is aiding the Fed’s inflation fight. But this rate shock risks tipping the economy into recession as well.

Early Signs of Economic Pain

The S&P 500 stock market index has plunged over 20% from its January peak as the 10-year Treasury yield climbed above 4%. Rate-sensitive sectors like housing and banking have been hit especially hard.

“For anyone with debt coming due, this is a rate shock,” said Peter Boockvar 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.”

There are already signs that higher borrowing costs are squeezing consumers. Credit card borrowing has jumped as households spend down excess savings built up during the pandemic. Credit card delinquencies have also risen to their highest level since early 2020.

“Unfortunately, I do think there has to be some pain for the average American now,” said Lindsay Rosner, head of multi sector investing at Goldman Sachs Asset Management. With mortgage rates above 7%, home sales have slowed dramatically and homebuilder stocks have been pummeled.

On the corporate side, retailers, banks and commercial real estate firms will feel the pinch of sharply higher borrowing costs in the high-yield debt market. This may force many companies to pull back on hiring and investment.

Regional banks with significant bond holdings have been under pressure, with a few smaller lenders collapsing already. Analysts warn more banks could be vulnerable if long-term yields keep rising.

No End in Sight for Yield Surge

After breaching key technical levels, many experts believe the 10-year Treasury yield could climb further from its current 4.7% towards 5% or higher.

The fact that stocks and bonds are falling in tandem shows the recent yield spike is being driven by fears of persistent inflation and an overly aggressive Fed, rather than slowing growth.

There is also growing concern over the precarious U.S. fiscal position, with the national debt at $31 trillion and rising.

“There are real concerns of ‘Are we operating at a debt-to-GDP level that is untenable?’” said Rosner.

Hitting 5% on the 10-year yield could cause additional financial stress, warned Michele. “At that point, you have to keep your eyes open for what looks frail,” he said.

With the Fed showing no signs of pausing rate hikes yet, the central bank seems willing to risk recession to get prices under control. That points to more pain ahead for borrowers as yields stay elevated.

Bracing For Impact

Consumers should prepare for higher rates on everything from home and auto loans to credit card debt. With inflation still north of 8%, it will be difficult to absorb these higher financing costs. Prioritizing debt paydown where possible could help.

Corporations face higher working capital costs at a time when profits are under pressure from inflation. They will likely respond by cutting costs, including jobs.

Banks are increasingly risk-averse in the face of losses on bond holdings. Small business owners may struggle to access credit.

The housing market will slow further as buyers face affordability challenges. Commercial real estate and retailers remain vulnerable to recession.

In short, no one will be immune to the cascading impacts of sharply higher borrowing costs. After years of ultra-low interest rates, theGreat Reset
means we may be in for a period of leaner times.

There are still opportunities amid the uncertainty, but investors and businesses must play defense and brace for the turbulence ahead.

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