It’s been quite a messy reaction in the bond market after the hotter-than-expected US CPI report yesterday. 10-year Treasury yields briefly pushed above 5.30% on the initial reaction before falling back now to around 5.10%, its lowest in three weeks. That’s certainly a welcome change for broader markets, but it doesn’t really change things all too much for the US economy.
The fact of the matter is just because borrowing costs are getting a little cheaper doesn’t exactly mean that they are actually cheap.
Think about it this way. Just imagine that you’re looking to buy a house and the bank offers you a mortgage at 7%. A few weeks later, that rate drops to 6.9%. Sure, that’s a better situation on paper. However, does it suddenly make that dream home affordable? Probably not. And that’s essentially the crux of the problem for the US economy.
10-year Treasury yields serve as a benchmark for borrowing costs across the economy. That goes from mortgage rates to corporate loans and also other forms of long-term financing. Even if these numbers don’t move in lockstep with yields, they are still very much influenced by the swings in the bond market.
When yields start to move higher as they have been in the past few months, the impact of that trickles all the way down the economic ladder.
For businesses, that could mean needing to put expansion plans on hold. If financing costs are rising and eating into profits, that leaves little room to borrow millions in wanting to build a new factory or base of operations. As for households, it could mean needing to delay that home purchase or cutting back on other spending to manage existing debt.
And unless yields fall back lower to levels for businesses and households to feel comfortable again, there is no compelling reason to make different decisions to the examples above.
As such, the bigger risk for the economy isn’t necessarily just Treasury yields climbing to fresh highs but how long yields will remain at these elevated levels. In other words, the economy doesn’t need another surge in borrowing costs to feel the pain. Just the fact that rates are high enough for long enough i.e. “higher for longer” is already enough to do the damage.
This article was written by Justin Low at investinglive.com.