The return of the benchmark 10-year Treasury Department On Monday, it again crossed the 5 percent mark, a key level that could impact mortgage rates, student debt, auto loans and more.
Last week, the 10-year yield crossed the 5 percent threshold for the first time in 16 years after Federal Reserve Chairman Jerome Powell said “inflation is still too high,” raising expectations that another interest rate hike this year may not be completely off the table.
“This has real implications for the economy and ultimately affects every individual in the U.S.,” said Mark Hamrick, senior economic analyst at Bankrate.com.
Stock futures fell on Monday as yields rose and investors assessed the prospect of longer-term higher interest rates from the Fed.
The 10-year bond yield is a barometer for mortgage rates and other types of loans.
“If the 10-year yield goes up, it will have a domino effect on almost everything,” said Brett House, an economics professor at Columbia Business School.
Even though many of these consumer loans are fixed, anyone who takes out a new loan will likely pay more interest, he said.
Why Treasury yields have risen
The yield on a bond is the total annual return that investors receive from bond payments. According to economists, there are many factors responsible for the recent rise in Treasury yields.
For one thing, yields tend to rise and fall according to the Federal Reserve’s interest rate policy and investors’ inflation expectations.
In this case, the central bank has been aggressively raising its key interest rate since the beginning of 2022 to contain historically high inflation and drive up bond yields. Since then, inflation has fallen significantly. However, Fed officials and recent strong U.S. economic data suggest interest rates will likely need to stay higher for longer than expected to finish the job. Higher oil prices have also stoked inflation fears.
But interest rates are only part of the story.
The recent rise in Treasury yields is largely due to a so-called “term premium,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
Basically, investors demand a higher return when they loan their money to the U.S. government – in this case for 10 years. One reason: Investors appear to be skeptical about rising U.S. national debt, Hunter said. Generally, investors demand a higher return if they see a greater risk that the government will be unable to repay its debts in the future.
The rapid rise in Treasury yields could “accelerate an already weaker economic picture that is being masked by higher interest rates,” Tony Dwyer, chief market strategist at Canaccord Genuity Group, said in a note Monday.
Mortgage rates will remain high
The biggest burden most Americans face is their mortgage. According to Freddie Mac, the average 30-year fixed interest rate is currently up to 8%.
“For those planning to buy a home, this is really bad news,” said Eugenio Aleman, chief economist at Raymond James.
“Mortgage rates will likely continue to rise and that will push affordability further into the distance.”
Student loans could become more expensive
There is also a connection between Treasury bond yields and student loan yields.
A college education is the second largest expense a person can incur in their life, after buying a home. To cover these costs, more than half of families take out loans.
Undergraduate students taking out new direct federal student loans for the 2023-24 academic year will now pay 5.50% – up from 4.99% in the 2022-23 academic year and 3.73% in the 2021-22 academic year.
The government sets the annual interest rates for these loans once a year based on the ten-year term of the Treasury.
If the 10-year yield stays above 5%, federal student loan interest rates could rise again when they reset in the spring, costing student borrowers even more in interest.
Car loans are becoming more expensive
There is also a loose correlation between Treasury and auto loan yields. The average interest rate on a five-year new car loan is currently 7.62%, the highest in 16 years, according to Bankrate. Today, more and more consumers are faced with monthly payments that they likely cannot afford.
“There are only so many people who can make an $800 to $1,000 car payment,” Bankrate’s Hamrick said.
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While other types of borrowing, including credit cards, small business loans and home equity lines of credit, are predominantly tied to the federal funds rate and rise or fall in line with the Fed’s interest rate movements, those rates could also rise, according to Aleman.
“Everything from business loans to consumer loans will be affected,” he said.
Savers can benefit
One group that is likely to benefit from higher returns are savers.
“We have been lamenting the plight of savers for many years,” Hamrick said. However, because returns tend to correlate with changes in the target interest rate on federal funds, deposit rates end up being higher.
High-yield savings accounts, certificates of deposit and money market accounts now pay over 5%, according to Bankrate, the most savers have earned in more than 15 years.
“This is the rare time in recent history where cash is looking pretty good,” Hamrick said.
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