Bond Yields Warn a Coming Recession

U.S. bond yields skyrocketed last week, leaving investors wary and preparing for what is to come. On Friday, June 10, the yield on the 10-year Treasury note hit 3.371%, according to The Wall Street Journal.

This historic high overshadows the previous record seen in 2011. Two-year bond rates rose 3.279%, their highest in 15 years.  

Bond yields are the amount of interest an investor gains off the bond. With the U.S. being in trillions of dollars in debt, $31 trillion to be exact, the side effect of the Federal Reserve’s move to raise interest rates to cool inflation means the bond yields will increase as well. 

As such, the U.S. will spend $1 trillion in interest rate payments alone if the Fed meets what investors say is its desired 4% increase. This $1 trillion would be spent solely on interest and would not touch the principal balance of the debt.

For every 1% rise in interest rate, the U.S. interest rate on bonds goes up by $300 billion. The Wall Street Journal stated that the Fed is looking to raise the interest rate in July above its previous 0.75%.  

The numbers look grim. If the Fed were to raise interest rates to meet its goal of curving inflation, it would trigger a debt crisis.  

According to the Wall Street Journal, raising rates too quickly to force an economic cool-down would be ineffective. The primary reason is that it would reduce their efforts to monitor whether the monetary tightening was working effectively. By moving too quickly without carefully watching the effects of rising interest rates, the Federal Reserve could tip the economy into a recession.  

Gennadiy Goldberg, a senior U.S. rate strategist at TD Securities, gave an analogy as to what it would be like if the Fed became too aggressive, too quickly. Goldberg said it would be “like looking in your rearview mirror and realizing you missed your exit.”

Richard McGuire, a strategist at Rabobank, said, “The combination of collapsing consumer sentiment, unexpectedly intense price pressures, and expectation of Fed activism are conspiring to create a particularly toxic cocktail for risky assets.” He continued by pointing out the current inverted yield curve, saying it “resonates with the notion that the need to tackle elevated price pressures will see the Fed tip the economy into recession.”  

According to Investopedia, a risk asset generally refers to items whose prices are subject to various levels of volatility, such as equities, commodities, high-yield bonds, real estate, and currencies. 

Mohit Kumar, an interest rate strategist at Jefferies International Ltd, stated, “The high inflation print has put a dent to the peak inflation and peak-Fed-hawkishness narrative. From a Fed perspective, the question is whether they will need to respond even more forcefully with a 75bp (0.75%) at the June meeting.”