The US 10-year Treasury yield briefly surpassed 5% on Monday, a level not seen since 2023, primarily driven by elevated diesel prices. This sharp increase in yields has implications for consumer borrowing costs, potentially driving up rates for mortgages and auto loans.
By mid-afternoon ET, the 10-year Treasury yield had receded slightly to 4.967%, while the 20-year Treasury yield stood at 5.376%. In financial markets, the Dow Jones Industrial Average saw a decline of 152 points (0.3%), with the S&P 500 and Nasdaq both falling by 0.5%.
The bond market has experienced a significant sell-off in recent weeks, influenced by concerns over escalating energy prices due to the conflict in Iran and anticipation of potential interest rate hikes by the Federal Reserve. As investors sold off bonds, Treasury yields, which represent the annual interest paid on government debt, climbed.
On Monday, diesel prices reached a record high of $6.23 per gallon, according to AAA, as the Middle East conflict shows no signs of abating. Economists warn that the rise in diesel costs could ripple through the economy, exacerbating inflation as the transportation of goods like food and apparel relies heavily on diesel-powered trucks.
Nic Puckrin, cross-asset analyst and founder of Coin Bureau, suggested that inflation risks stemming from the Strait of Hormuz crisis are eroding bond values, prompting investors to demand higher yields. "The 10-year Treasury yield topping 5%, even if briefly, is more consequential for US households than what the Fed does on Wednesday," Puckrin told The Post. "That's the rate that sets your mortgage rate, which is why they are getting close to 7%. If the 10-year yield pushes higher, 7% mortgages are in the cards."
Treasury Secretary Scott Bessent announced plans for the Treasury to buy back up to $6 billion in government debt, triple the usual amount, in an effort to stabilize markets. However, investor sentiment remains cautious, with concerns that these measures may not be sufficient as long as the conflict and its inflationary effects persist.
Treasury yields are currently nearing levels not seen since 2007, posing a risk of further increases in mortgage rates and potentially pricing more buyers out of the housing market. The US housing sector has been largely stagnant for four years due to persistently high interest rates, discouraging homeowners with favorable rates from selling and limiting new construction due to developers' reluctance to undertake projects amidst high borrowing costs.
As of the previous Friday, the average rate for a 30-year fixed mortgage stood at 6.76%, according to Freddie Mac. Auto loan rates are also closely linked to Treasury yields, which could impact car affordability for consumers already contending with high vehicle prices and rising fuel costs.
Higher yields can also present a challenge to the stock market by offering a more attractive, safer alternative to equities, potentially leading investors to divest from stocks and lower market valuations. Furthermore, Treasury yields influence the cost of corporate bonds, which companies utilize for borrowing and investment, including in artificial intelligence technologies that have significantly contributed to stock market growth this year.
The Federal Reserve is widely expected to implement a quarter-point interest rate hike at its upcoming meeting in an attempt to curb inflation. However, experts note that such a move may not address the root causes of the current bond sell-off. "The problem is that even if the Fed does hike on Wednesday, it’s not in the central bank’s power to fix the underlying problem. The widely expected hike won’t reopen Hormuz or resolve the Middle East situation," Puckrin stated. "Until then, consumers will face the double-whammy of higher prices at the pump and at the supermarket, combined with higher mortgages and borrowing rates. And as the US heads into winter, households in the Northeast that rely on heating oil could see their heating bills jump too. It could be a subdued festive season."