Key facts
- Bond yields have surged, with the 10-year US Treasury yield exceeding 5%.
- Higher borrowing costs are impacting consumers through elevated mortgage, auto loan, and credit card rates.
- Businesses are facing increased corporate borrowing costs and a rise in bankruptcy filings.
- Stock markets have declined amid the bond sell-off and concerns about the wealth effect.
- The Federal Reserve is expected to raise interest rates by 25 basis points this week.
High interest rates are already making borrowing more expensive for American consumers and businesses, with bond yields experiencing a significant sell-off. The yield on the 10-year US Treasury surpassed 5% on Monday, a level considered a "danger zone" for stocks. This surge is attributed to concerns over higher oil prices, the US fiscal position, and expectations of further Federal Reserve rate hikes.
Consumers are feeling the impact through elevated mortgage rates, which have hit 7.07%, and rising auto loan and credit card interest rates, with the latter reaching 23.8%. Businesses are also facing higher corporate borrowing costs, reflected in the ICE Bank of America US Corporate Index yield rising to 5.68%. This increased cost of capital is contributing to a rise in bankruptcies, with filings up 17% in the year to June, and a record 6.3% default rate in private credit as reported by Fitch.
The sell-off in bonds is also weighing on US stock markets, with the S&P 500 down 2% and the Nasdaq 100 down nearly 3% in the past month. This trend threatens the wealth effect, potentially leading consumers to reduce spending if their stock portfolios or property values decline.