Click to Enlarge

The yield on long-term 10Y US Treasury bonds remains close to multi-decade highs even after some relief in recent days. The 10Y yield eased to around 5.1% yesterday, but remains roughly 50 bps higher than before Chair Warsh’s Jackson Hole speech as markets have priced a more hawkish Fed path. The move has already tightened financial conditions, lifting mortgage and corporate borrowing costs and raising the hurdle rate for investment. As today’s chart shows, the 100 bps rise in 10Y yields this year has been driven mainly by expectations of Fed tightening and a wider term premium, rather than by a major shift in growth or inflation fundamentals.  …Why this matters: Higher yields will continue to pressure interest-rate-sensitive areas such as housing and credit-dependent spending, but they do not necessarily imply a broad downturn. Much of the private sector remains insulated by fixed-rate borrowing, relatively low debt-service burdens and strong corporate balance sheets.