Surging Treasury yields don’t signal a U.S. 'fiscal apocalypse'

Treasury yields above 5% are raising fears that higher borrowing costs could fuel a debt spiral.

The 10‑year Treasury yield closed at 5.02% on October 23, 2023, the first time it has exceeded 5% since June 2007. This move came after the Federal Reserve kept its policy rate steady at 5.25‑5.50% following its September meeting, signaling that higher rates may persist. At the same time, the Treasury Department reported that outstanding federal debt reached $33.4 trillion, and the Congressional Budget Office projects net interest costs will climb to $1.2 trillion in fiscal year 2024. The recent $92 billion auction of 10‑year notes attracted weaker‑than‑expected bidding, with a bid‑to‑cover ratio of 2.3 versus the 2.5 average of the past year.

The average 30‑year fixed mortgage rate rose to 7.48% in the week ending October 26, 2023, its highest level since 2001, directly tracking the 10‑year yield. For a $300,000 loan, that translates to a monthly principal‑and‑interest payment of about $2,120, roughly $150 more than when the rate was 6.5% earlier this year. Higher payments reduce the amount borrowers can qualify for, potentially cooling demand in the housing market.

The last time the 10‑year yield stayed above 5% for an extended period was in 2006‑2007, when the Federal Reserve was tightening after the dot‑com bubble and before the housing market peaked. Since then, the federal debt‑to‑GDP ratio has risen from roughly 65% to about 120%, making the government far more sensitive to changes in borrowing costs. In fiscal year 2020 interest consumed 8% of federal outlays; the CBO estimates it will reach 15% by 2025 if yields remain near current levels. Market analysts note that foreign official holders, especially Japan and China, have increased their Treasury purchases this year, providing a buffer against a sudden sell‑off.

Investors should watch the Treasury’s next 10‑year note auction scheduled for November 15, 2023, which will test demand after the recent weak bidding. The Federal Reserve’s December 13 meeting will reveal whether policymakers hold rates steady or signal another hike, directly influencing yields. Congress is set to vote on a temporary debt‑limit extension in early January 2024, a deadline that could trigger market turbulence if not resolved. Despite higher yields, foreign central banks added a net $45 billion to their Treasury holdings in September, suggesting that global demand may keep borrowing costs from spiraling further.