Let’s start with a loan that has an interest rate of 4.81%.
Now, if you’re taking out a mortgage, buying a car, or paying off a credit card, 4.81% is a bargain these days. But if you are the federal government, not so much.
The yield on the 10-year Treasury note – the annual interest the United States pays on 10-year loans – reached 4.81% on Tuesday, its highest level since 2007.
The thing is, when it becomes more expensive for Uncle Sam to borrow money, a lot of things change in this economy.
You know how some workplaces do March Madness brackets or Oscars? Well, the fixed income team at investment firm BlackRock has a version of this. At the beginning of the year, they try to predict what the yield on the 10-year T-note will be on December 31st.
“I know what you’re going to ask next, I admit it. “I had predicted that 10-year bond yields would probably be closer to 3% by year-end,” said Steve Laipply, co-head of exchange-traded fixed income funds at BlackRock.
In January, he believed that the Fed’s fight against inflation was essentially over and that interest rates would be cut.
Needless to say, Laipply won’t win.
“The Federal Reserve speakers have spoken out in unison, and some of them have been quite hawkish in their statements that they may need further rate hikes,” Laipply said.
When the Fed raises interest rates or investors believe it will keep interest rates high for a while, Treasury yields rise.
But Fed Chairman Jay Powell is only part of the equation.
The government bond market is not immune to supply and demand, said Michael Cudzil of investment firm Pimco.
“The offer is huge today,” said Cudzil.
Through the first 11 months of fiscal year 2023, the federal government ran a $1.5 trillion deficit — representing new debt being put into the bond market to find buyers. “These debt levels are quite high,” Cudzil said.
And what are these investors trying to get to buy this debt? Higher yields.
But if you say, “Well, this debt is Congress’ problem,” Bill English of the Yale School of Management has bad news for you… and anyone who uses credit.
“So buying a house becomes more expensive in terms of mortgage payments and buying a car becomes more expensive in terms of car payments,” English said.
Because even though Congress is, well, Congress, global investors still believe that the U.S. government is a very safe place for their money.
For this reason, the interest rate on the 10-year T-note is the benchmark for many other loans. If you borrow in these markets, you will have to pay higher interest rates.
But English said it’s not all a detriment to U.S. consumers.
“Higher interest rates in the U.S. make dollar investments attractive, so the dollar becomes stronger and imports become cheaper,” English said.
A strong dollar also means a good time for foreign travel. Just don’t finance the trip with a credit card.
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