5.23% Treasury Yields Top 17-Year High: Why Your Home Loan Just Got More Expensive
Sticky inflation and a tech spending boom are driving the surge, according to Macquarie Group strategist Thierry Wizman.
The benchmark 10 year Treasury yield has climbed to 5.23 percent this week. This figure is the highest level seen since 2007. For the average home buyer this number is not just a market statistic. It is the lever that moves the monthly mortgage payment. When this yield goes up the cost of borrowing for home buyers goes up significantly. Bond yields and prices move inversely to one another. When prices drop yields rise.
The rapid climb above 5 percent earlier this month shows a shift in investor belief. The market is signaling that the Federal Reserve is likely to tighten policy further. The Chicago Mercantile Exchange FedWatch tool suggests a 64 percent probability of a rate hike in October. This sentiment is driven by sticky inflation. The University of Michigan consumer sentiment index confirms this worry. Their data shows year ahead inflation expectations jumped to 4.6 percent in September. This is the highest reading since June. Investors are pricing in the risk of higher rates.
Thierry Wizman global FX and rates strategist at Macquarie Group offers a different perspective on the runup. He argues that the inflation story is only half the picture. Wizman told CNBC that this year the focus should be on bond issuance rather than just inflation expectations. He notes that yields at these levels are not unusual given the current market conditions. The market is in the midst of a very strong investment cycle. He calls the current situation abnormal because it is not accompanied by extreme inflation expectations.
However the demand for money is driving the yield higher. The federal government is issuing debt to cover a large deficit. At the same time companies are borrowing heavily to fund artificial intelligence infrastructure. The supply of bonds has increased enough to put upward pressure on yields. The AI spending boom is creating a new source of supply. Vanguard provides the numbers for this corporate borrowing spree. Alphabet Amazon Meta Platforms Microsoft and Oracle issued about 132 billion of debt through July. This is a sharp increase compared to the roughly 35 billion average annual total between 2020 and 2024.
The broader AI related debt issuance could reach 300 billion to 570 billion this year. This money is going toward data centers semiconductors and utilities. The capital spending plans of hyperscalers and their suppliers are likely to keep issuance elevated for the rest of the year and into next year. Higher yields act as a weight on stock prices. They raise the cost of borrowing for companies and make bonds more attractive to income seeking investors. As long as the AI buildout continues the bond supply remains high. This suggests that these yields could go higher.
First reported by CNBC: Finance.
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