The interest rates the United States has to pay for the bonds it sells to fund the government have been surging. This was once a niche obsession of financial markets, but it is swiftly evolving into a much broader issue, with implications that extend far beyond the immediate pain of steeper borrowing costs for households. Already, it has prompted the Treasury Department to intervene more forcefully in this key global market.
This is no ordinary bond-market sell-off. It’s being driven by forces unlike those of the recent past. And if it persists, it could mark the beginning of a structural economic shift more enduring and more globally consequential than most previous episodes of market volatility.
The leap in the cost of borrowing has been breathtaking. Rates on newly issued 30-year U.S. bonds, considered one of the world’s safest bets, recently hit 5.3 percent, up from 1.7 percent in 2021. The American government hasn’t had to pay such high rates since 2007, on the eve of the global financial crisis. That means more federal revenue goes to service the debt — nearly 20 percent — leaving less available for, say, defense or health care.
The pain is spreading, especially as corporate borrowers also face a widening credit spread — that is, the extra risk premium they must pay relative to comparatively risk-free government debt. On Main Street, people are struggling to buy homes or refinance because mortgage rates are so high. It’s the same story for auto loans and credit-card balances.
Ask 100 market players why rates are rising, and they would undoubtedly point to the usual suspects: stubborn inflation, ballooning government debt and fiscal deficits and the sting of higher gas and diesel prices tied to the war with Iran.
While these explanations make historical sense, they risk misleading policymakers and investors alike on both the “why” and the “so what” of the current situation.
There are four new and significant issues at play...
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