Why High Treasury Yields Should Worry You

The yield on the 10-year Treasury note ended at 3.564% on Tuesday – the highest in more than a decade. That’s in anticipation of those interest rate hikes from the Federal Reserve that are set to hit us on Wednesday.

In case you’re a little rusty: the 10-year T-note is really just a 10-year loan that investors give to the federal government. So why should you care if this loan is a bit more expensive for the federal government than it was before?

Even if you’ve never been late with a bill in your life and you still have your 1954 Diner’s Club card, the US government has a better credit rating than you.

So when the interest rate that Uncle Sam has to pay on his debt goes up, so does the interest rate you have to pay on just about everything – because you’re a riskier bet.

“When you’re making car loans there’s obviously at least some degree of risk, even for customers who have very good credit, and therefore the Treasury yield provides a kind of lower bound than what we’re able to offer,” said Matt Dundas, who leads the auto finance unit at Carvana.

Since the yield on Treasury debt has skyrocketed in recent months, “we’ve passed on at least half of that to consumers, and in many cases more than that,” Dundas said.

But what if you don’t need a new auto loan or mortgage or credit card balance transfer?

Higher yields on government bonds also mean companies will have to pay higher rates on their debt, said economist Erik Norland of CME Group.

If you plan to go beyond silent shutdown, you should be concerned about that as well. “As corporate bond yields rise, hiring generally slows,” Norland said. “And that’s something I think the Federal Reserve wants to achieve.”

Because a cooling labor market should dampen wage growth, which should dampen inflation. At least, that’s the logic. It’s not just the 10-year-old T-note you should pay attention to. Interest rates on some shorter-term debt are higher – the so-called “inverted yield curve”.

“What this suggests is that down the road, a recession is going to unfold,” said Quincy Krosby of LPL Financial.

Bond markets aren’t right about it all the time, Krosby said. But they are worth watching.

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