The 10-year U.S. Treasury note yield reached 5.34% this week, its highest level since 2002, 24 years ago, when the dot-com bust rattled the economy. Investors are dumping bonds and asking the government for more to lend it money, citing higher prices at the pump and beyond.
It’s the second milestone in short order. The 10-year yield had only recently touched its highest level since 2007. Meanwhile, yields on the 30-year Treasury climbed to a more-than-two-decade high.
Inflation Sets the Price
The mechanics are simple. The pressure is real. Higher prices erode investments’ value over time, so bondholders want compensation. They’re seeking it for the hit from higher gas and diesel prices, and they’re demanding higher rates at government bond auctions.
They’re also looking ahead. Bondholders are pushing yields higher because they expect the Federal Reserve to keep raising its target interest rates.
That expectation has fresh support. A stronger-than-expected report on gross domestic product, the broadest measure of U.S. economic activity, came out Wednesday. An inflation report showed prices rising well above the Fed’s target. The Fed is expected to respond.
An Economy Running Hot
The economy appears to be overheating, with unemployment low. The September jobs report, due Friday, was forecast to show unemployment holding at 4.1%, a rate economists call “full employment.”
Consumer spending remained strong, fueled by a strong stock market. Spending on AI infrastructure, meanwhile, ran into the trillions of dollars each year. It’s expected to keep growing over the decade and beyond, even as interest rates rise.
Growth is strong. So is the price pressure, and fuel costs sit at the center of it. Resurgent inflation linked to high oil and fuel prices has helped push rates higher around the world.
Debt Worries Cross Borders
Fiscal concerns are adding weight to bond-market moves. Government spending by both political parties puts the country on an unsustainable fiscal path, critics said. Investors are factoring that into what they charge.
The pressure isn’t confined to Washington. Debt concerns and high fuel prices have pushed rates higher around the world. On Thursday, the 30-year U.K. government bond yield reached 6% for the first time since 1998, 28 years ago.
The Friday jobs report, just one day away, will give the Fed and investors another read on how hot the economy is running.
Why This Matters: A 5.34% benchmark yield sets the tone for borrowing costs across the economy, and the Fed is expected to keep raising its target rates. Households already absorbing higher gas and diesel prices could face the cost of that policy response, too. Seen through a center-left lens, this raises a question about who carries the burden when inflation, debt worries and rate increases arrive together. Expected growth in AI infrastructure spending and a stock-market-fueled spending boom show that gains in this economy aren’t evenly felt. The warning about an unsustainable fiscal path also puts pressure on both parties. They’ll have to show how public budgets can be steadied without leaving people already stretched by high prices to pay for it. The same pressures are showing up in U.K. bond markets, a sign the problem isn’t only American.