What does it mean for the U.S. key interest rate to “break five” for the first time in 16 years?

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As one of the most watched interest rate indicators in the world, the U.S. 10-year Treasury bond yield once rose above 5%, reaching the highest level since 2007, triggering turmoil in the global financial market and bringing new uncertainty to the world’s economic growth prospects. . Why are 10-year U.S. Treasury yields soaring? What impact will it have on global financial markets and the world economy? What is the future trend?

“Broken Five” Impact Geometry

The fluctuation in the 10-year U.S. Treasury yield affects the U.S. federal government’s borrowing costs, the Federal Reserve’s interest rate hike expectations and the U.S. economic outlook, which has attracted much market attention. This indicator is also regarded by the market as a benchmark for global asset prices, and its trends have a broad impact on international financial markets and the world economy.

For the United States, the rise in Treasury bond yields means that a series of borrowing costs such as mortgages, car loans, and corporate bonds have risen, pushing up the financing costs of households and businesses, thereby suppressing consumption and production. For example, the 30-year fixed mortgage interest rate in the United States recently exceeded 8%, reaching the highest level since 2000, causing an impact on the U.S. real estate market.

Secondly, the Federal Reserve’s monetary policy may be affected. Federal Reserve Chairman Jerome Powell recently hinted that the Fed may continue to hold off on raising interest rates in light of the recent tightening of financial conditions caused by a rise in long-term Treasury yields. Some analysts estimate that the effect of the current high U.S. bond yields is equivalent to the Federal Reserve raising interest rates by 50 basis points.

Dean Baker, a senior economist at the Center for Economic and Policy Research, told Xinhua News Agency that as the 10-year U.S. Treasury yield soared, the price of bonds held by banks and other institutions fell, and asset values ​​faced the risk of further shrinkage, which may trigger more Much like the closure of Silicon Valley Bank.

Desmond Lachman, an economist at the American Enterprise Institute, also believes that the current situation may lead to huge losses in the market value of banks’ bond portfolios, causing new pressure on the financial system and triggering a wave of loan defaults.

From a global perspective, rising U.S. bond yields will widen the interest rate gap between the U.S. and other countries’ bonds, and the U.S. dollar exchange rate will gain upward momentum. Other countries, especially emerging market countries, will face risks such as capital outflows, increased debt burdens, and heightened inflation. In addition, global investors will revalue and allocate assets as a result, and financial market fluctuations such as stock markets will intensify.

The New York Times pointed out that global borrowing costs tend to rise as U.S. bond yields rise, with a particularly obvious impact on emerging economies. Emerging economies have to face the double blow of rising U.S. bond yields and a stronger U.S. dollar. Countries with U.S. dollar debt will bear higher debt servicing costs.

What is the reason for “breaking five”?

Many analysts believe that the recent surge in U.S. bond yields is mainly due to the significant oversupply of U.S. Treasury bonds, and the root cause is that politicians from both parties in the United States only care about immediate political interests and ignore the long-term financial health under the “turn-taking” system, and spend excessively. , the debt issue has become a political game between the two parties.

Since the beginning of this year, partisan disputes over issues such as the federal government’s debt ceiling and budget have intensified again in the United States. Since Congress agreed to adjust the federal debt ceiling in early June, the U.S. government has significantly increased its issuance of national debt. In August this year, the U.S. Treasury Department increased its quarterly bond issuance for the first time in two and a half years, and said it may increase further in the next few quarters.

According to data from the U.S. Department of the Treasury, as of September 18, the U.S. federal debt exceeded $33 trillion. In the 2023 fiscal year, which ended on September 30, the federal government’s fiscal deficit reached nearly $1.7 trillion, an increase of 23% over the previous fiscal year.

Rahman said the U.S. government still maintains high budget deficits during a period of economic expansion. At the same time, the Federal Reserve gradually reduced its holdings of Treasury bonds and reduced its balance sheet, further increasing the supply of Treasury bonds.

The British “Financial Times” reported that investors are worried about the ballooning U.S. government budget deficit, and the downgrade of the U.S. credit rating by international rating agency Fitch in August exacerbated these concerns and increased upward pressure on U.S. bond yields.

Baker believes that the Federal Reserve’s statement that “high interest rates will last longer” is another reason for the recent surge in U.S. bond yields.

Over the past year or so, the Federal Reserve has continued to aggressively raise interest rates to combat inflation, driving the 10-year U.S. Treasury yield to continue to rise. Although the U.S. inflation rate has fallen back recently, the core inflation rate remains high, making the probability of the Federal Reserve lowering interest rates in the near future.

Will the uptrend continue?

Some analysts say the 10-year U.S. Treasury yield may rise further in the future. Philippe Colmar, managing partner of MRB Partners, a macroeconomic research institution, predicts that U.S. bond yields may exceed 5.5% by 2024. Adam Phillips, general manager of portfolio strategy at EP Wealth Advisors, a wealth consulting firm, said that the possible federal government “shutdown” crisis in November may push U.S. bond yields higher again.

However, well-known investor Bill Ackman said that due to the increasing geopolitical risks, some investors may buy U.S. debt for hedging purposes, and the U.S. economy is slowing down faster than the data shows, which means that U.S. debt Yields may fall.

Baker believes that the U.S. economic growth in the fourth quarter of this year is not optimistic. Although the Federal Reserve is in no rush to cut interest rates, as the inflation situation becomes clear, Federal Reserve officials may release interest rate cut signals, driving down long-term interest rates. The 10-year U.S. Treasury yield will fall back to 4%.

International ratings agency Moody’s said that the “sudden and rapid rise” in the 10-year U.S. Treasury yield has shaken people’s confidence in the U.S. economy and may cause the U.S. economic expansion to go off track.

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