Bond yields surged to a 16-year high on Wednesday, sparking fears of a financial market crisis and undercutting the economy. The 10-year Treasury note yield climbed to 4.880%, the highest since 2007. Yields have risen sharply in recent months, driven by the Federal Reserve's hawkish stance on interest rates and concerns about rising inflation.
The Fed is raising interest rates in an effort to combat inflation, which is at a 40-year high. However, higher interest rates make it more expensive for businesses and consumers to borrow money, which can slow economic growth.
The surge in bond yields has also raised concerns about a financial market crisis. In March, the collapse of Silicon Valley Bank and a meltdown in regional banks were linked to rising bond yields.
"The surge in bond yields has sparked concern about another financial market blowup," said Federated Hermes. "The higher yields also threaten to undercut the economy as rising borrowing costs threaten to dampen consumer spending and capital spending by companies."
The Fed has not pushed back on the rise in bond yields, and has even made comments to encourage it. Last week, New York Fed President Williams said that even if the Fed was done raising interest rates, policymakers would keep them high "for some time" to bring inflation down to their 2% goal.
Analysts say that bond yields could continue to climb unless U.S. price pressures weaken substantially or the labor market suddenly craters. The higher bond yields go, the risk of a crisis in financial markets increases.
"If the moves get extreme or persistent, it could get the Fed engaged," said former Fed Vice Chair Clarida.
Some analysts believe that only a meltdown in the equity market could revive demand for government bonds that knock yields lower.
"There is no magic level of yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally," said Barclays Plc. "In the short term, we can think of one scenario where bonds rally materially. If risk assets fall sharply in the coming weeks."
The surge in bond yields is a major concern for investors and policymakers alike. If yields continue to rise, it could lead to a financial market crisis and undercut the economy.
