On Monday, the yield on the US 10-year Treasury briefly crossed the 5% mark for the first time since 2023, driven by rising diesel prices. This surge might lead to higher borrowing costs for mortgages and auto loans.
By around 3:20 p.m. ET, the yield retreated to approximately 4.967%. Additionally, the yield for the 20-year Treasury was lifted to 5.376%.
The Dow Jones Industrial Average saw a decline of 152 points, or 0.3%, while both the S&P 500 and Nasdaq dipped by 0.5% each.
Worries over increasing energy prices due to the conflict in Iran, along with speculation about a potential interest rate hike by the Federal Reserve this week, have sparked a several-week-long sell-off in bonds. As traders unloaded bonds, Treasury yields—the annual returns offered to investors holding government debt—rose significantly.
On Monday, diesel prices reached a high of $6.23 per gallon according to AAA, amidst ongoing tensions in the Middle East.
Economists are cautioning that the escalation in diesel prices could have a ripple effect throughout the economy, exacerbating inflation. This is particularly concerning since many everyday goods, from food to clothing, are transported using heavy trucks powered by this expensive fuel.
Nic Puckrin, a cross-asset analyst and founder of Coin Bureau, suggested that inflation risks linked to the Strait of Hormuz issue might reduce bond values, leading to increased demand for higher yields from investors.
“The fact that the 10-year Treasury yield has surpassed 5%—even if just momentarily—is more significant for American households than any decisions made by the Fed on Wednesday,” he observed on Monday.
Puckrin added, “That’s the rate that largely determines mortgage rates, which are approaching 7%. If the 10-year yield continues to rise, we could see 7% mortgages becoming a reality.”
Treasury Secretary Scott Bessent attempted to reassure traders with an announcement to repurchase up to $6 billion in government debt, a figure three times the usual amount. However, uncertainty persists among investors as long as the war continues to exert inflationary pressure.
The current levels of Treasury yields are among the highest seen since 2007, potentially pushing mortgage rates even higher. This trend may further restrict access to the housing market for buyers who are already facing tight conditions.
The US housing market has been relatively stagnant for the past four years, primarily due to persistently high interest rates, and homeowners who locked in lower rates are hesitant to sell.
This creates a challenging cycle; increased interest rates can deter developers from building new properties, consequently keeping supply low and adversely affecting the rental market.
As of last Friday, the average rate for a 30-year fixed mortgage stood at 6.76%, according to Freddie Mac.
Auto loans, which are similarly tied to Treasury yields, could complicate matters for consumers already grappling with high dealership prices and rising fuel costs.
Higher yields may also pose a risk to the stock market, as they present a safer investment alternative, potentially leading traders to sell off their holdings and drive stock prices down.
Moreover, Treasury yields play a role in the corporate bonds that businesses rely on for borrowing, which has been key for funding expansions in areas like artificial intelligence—an important contributor to stock market growth this year.
Looking ahead, the Federal Reserve is generally expected to raise interest rates by a quarter point during their Sept. 16 meeting in a bid to combat inflation. However, as Puckrin noted, this action is not a solution to the ongoing bond sell-off.
“Even if the Fed raises rates on Wednesday, it cannot address the root issues. The anticipated hike won’t resolve the conflict in the Middle East or stabilize the situation in Hormuz,” he remarked.
“In the meantime, consumers will continue facing combined pressures of rising prices at the gas station and grocery store, alongside increasing mortgage and borrowing rates. As winter approaches, households in the Northeast that depend on heating oil might see their heating costs rise as well. This could lead to a rather quiet holiday season.”
