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Is the US Economy Heading for Recession Amid Bond Yield Surge?

US Economy Teetering: Will Surging Treasury Yields Lead to a Recession?

October 25, 2023, 7:47 pmupdated March 12, 2024, 12:00 pm 1.9k Views

A Fanned Pile Of Hundred Dollar Bills Lying Atop A Larger Fanned Pile Of Treasury Notes.

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US Economy Recession Risk

Is the US Economy Heading for Recession Amid Bond Yield Surge?

US Economy Recession Risk looms as 10-year Treasury yields surge, casting a shadow over the robust growth of recent years.

The Tug of War: How Rising Treasury Bond Yields Could Shape America's Economic Future

As we sail through the sea of economic fluctuations, a recent storm has appeared on the horizon. The U.S. economy has shown remarkable resilience in the face of soaring inflation, high-interest rates, and even the resumption of student loan payments. However, there's a new player in town that could potentially disrupt this economic tranquility – the surge in 10-year Treasury bond yields. Could this be the harbinger of a mild recession on the horizon? Let's dive into the details and explore the multiple facets of this complex issue.

The Growth Spurt

First, let's acknowledge the remarkable growth the U.S. economy has experienced. According to economists surveyed by Wolters Kluwer Blue Chip Economic Indicators, the economy grew at a robust 3.5% annual rate in the third quarter of this year. This surge was driven by strong consumer spending, an impressive uptick from the solid 2%-plus gains observed in the first half of the year.

However, the looming question is, can this momentum be sustained? The same survey suggests a slowdown, with growth expected to dip to 0.7% in the current quarter and 1.1% for the entirety of the next year.

The Role of Rising Treasury Yields

One major factor influencing this economic pullback is the surge in long-term rates, notably the 10-year Treasury bond yields. The 10-year bond recently soared above 5% for the first time since 2007, up from 3.2% in early April and 4.6% in October. This sudden increase has had a ripple effect, casting a shadow over the stock market and raising concerns about the economic outlook.

Why are these rising yields causing concern? Well, the 10-year Treasury bond is a benchmark, and its movement can impact various consumer and business loans. Higher long-term rates could push 30-year mortgage rates to around 8%, which might significantly impact the housing market. These loftier rates could also discourage business investments and hamper U.S. exports, among other impacts.

Economist Matt Colyar of Moody's Analytics emphasizes the significance of this issue, stating, “It's bad news for the economy. It's a major headwind.”

Federal Reserve's Role

The Federal Reserve, under the leadership of Chair Jerome Powell, has been watching these developments closely. Powell has indicated that the bond's rise is helping in the fight against inflation, making it less likely that the central bank will need to raise short-term interest rates again.

Yet, the 10-year yields continue to fluctuate. As we saw on Wednesday, they dipped as low as 4.8% but then rebounded to 4.9%. This situation has kept the market on edge and contributed to a 1.2% fall in the S&P 500 index.

Why Are Yields on the Rise?

Economists cite several reasons for this surge in long-term rates:

The resilient U.S. economy, despite a series of 5.25 percentage points in Federal Reserve rate hikes since last year, has raised expectations for a prolonged period of higher rates.
Persistent inflation, recently hovering around 3.7%, has resulted in expectations that the Fed will maintain elevated short-term rates to counteract rising costs.
A looming $2 trillion federal deficit in fiscal 2023 and even larger projected gaps in 2024 have raised concerns about potential debt standoffs in Congress, leading to an increased supply of Treasury bonds, which could push yields higher.

Contrasting Perspectives

Barclays economist Jonathan Barclays remains unconvinced that these high long-term rates will be the final straw that undermines the economy. He points to strong job and wage growth and the reluctance of employers to lay off workers due to pandemic-related labor shortages. In his view, “It should slow the economy,” but he also highlights the risk that the impact might be different from what people anticipate.

Matt Millar raises the possibility of the Fed stepping in if the economy weakens significantly, cutting rates sooner than expected. This action could lower 10-year yields and alleviate financial pressures.

Economic Impact on Housing and Business Investment

The surge in 10-year bond yields has already nudged 30-year mortgage rates to around 8%. While this has been a mixed bag for the housing market, with existing home sales being impacted, the limited housing supply has prevented home prices from falling. This situation has prompted builders to put up more new homes, generating economic activity.

In the world of business investment, the trajectory of corporate bonds and other business loans mirrors long-term Treasury rates. Small businesses have not drastically altered their capital spending plans, according to a September survey by the National Federation of Independent Business. However, an increasing number report that their last loan was harder to obtain, with financing becoming a top business concern.

If businesses face difficulties in securing loans, this could translate to reduced investments and hiring.

The Impact on Exports and the Stock Market

Higher Treasury rates have made it more appealing for U.S. and foreign investors to channel their funds into U.S. bonds. This has increased the value of the dollar, making it more expensive for overseas companies to buy American-made goods, which in turn affects U.S. exports and economic growth.

The impact on the stock market is notable. A 5% Treasury yield could prompt investors to shift their focus from stocks to bonds, which could lower equity prices. A downturn in the stock market could potentially affect consumer spending, as every dollar reduction in wealth leads to a decrease in spending.

It's clear that the U.S. economy is at a critical juncture, and the tug of war between economic resilience and the challenges posed by rising Treasury bond yields continues. As we navigate these turbulent waters, the decisions made by the Federal Reserve, policymakers, and businesses will significantly shape the economic landscape in the coming months. We'll be watching closely as this story unfolds, and we invite you to join the conversation by sharing your thoughts and insights. How do you perceive the impact of these rising yields on the U.S. economy? Let your voice be heard, and let's navigate these economic waters together.

This article was written by the NewsBurrow Press Team, keeping you informed about the latest economic developments and their impacts on our lives. Join the conversation and share your views.

As we delve into the intricate web of economic forecasts and the potential implications of rising Treasury bond yields, it becomes clear that the financial landscape is shifting. The U.S. economy, often characterized by its resilience, is now facing a crossroads where factors like inflation, interest rates, and fiscal deficits converge. The question that looms over our heads is whether these developments will ultimately steer the nation towards a mild recession in the coming year.

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