The relationship between the 10-year Treasury yield and nominal U.S. economic growth has perhaps been overlooked during the bond selloff. But analysts who track this ratio aren't especially concerned.
The benchmark yield touched 5% on Monday, its highest since October 2023. But nominal year-on-year GDP growth for the first quarter was at 6.07% and rose to 6.56% in the second quarter, keeping borrowing costs below the economy's growth rate.
Economists say that growth cushion lets Washington expand deficits without the debt burden spiraling out of control.
That could change if the arithmetic flips. When Treasury yields exceed growth, debt becomes increasingly heavy to sustain as interest costs compound faster than revenue. With yields rising and deficits wide, analysts say the margin for error is narrowing.
Real growth
Inflation concerns are swirling again with Kevin Warsh at the helm of the Federal Reserve, but price worries are far from the leading factor in this year's yield rise. The U.S. Treasury's long-term real rate average, reflecting the unweighted average of bid real yields on all outstanding inflation-protected securities with remaining maturities of more than 10 years, has risen to 2.92% this week from 2.55% at the end of last year.
That figure stands to bear watching as the year goes on, because rising real rates are consistent with solid economic growth, which is the administration's recipe for dealing with the debt worries.
"The recent rise in long-end Treasury yields has been driven predominantly by real rates," said Gennadiy Goldberg, head of U.S. Rates Strategy at TD Securities USA.
Deal rumblings
What started out as the year of the megadeal is coming under pressure with borrowing costs surging higher. Investors are describing a dramatic shift in mood.
One hedge fund manager described fear creeping into conversations with other investors and bankers days before Labor Day, which has long marked the unofficial end to summer and a return to stronger trading volumes plus stepped-up deal activity.
Now many are bracing for a potential slowdown, several investors said, that could push the timeline for getting deals done out by months. Some investors said dealmakers can compensate through price adjustments and deal structure, but they also report seeing a noticeable drop in what buyers are willing to pay — not what Wall Street wants to hear.
"The cost of doing everything is becoming more expensive and that's going to affect deal making," another investor said.
Bond selloff pushes 10-year yield to 5%
NEW YORK, Sept. 14 (Reuters) - The U.S. bond selloff that started with the war with Iran has pushed the 10-year Treasury yield to 5%, a level it hasn't held for long in almost two decades. What happens now?
Some analysts say stocks and other markets could take a hit because of higher borrowing costs for consumers and businesses. But it's not necessarily that simple. The capital spending spree driven by the rise of AI is the sun in this universe, some analysts say, and rising yields mostly point to a strong economy in which funds are in heavy demand. As long as the AI boom keeps rolling, so will markets more broadly, supporters of this view contend — even with AI stocks hitting turbulence on Monday.
A competing take has gained steam this summer. Rich-country governments have been on a spending spree, led by the U.S., where a longstanding fiscal deficit has recently been widening and government debt lately passed the $40 trillion milestone. Could the bond selloff, mild as it has been by many measures, presage more pain ahead?
With the S&P 500 not far from another fresh record, we look at the keys to the market after Labor Day:
Higher yields, valuations and borrowing costs
Corporate borrowing costs
Higher 10-year yields will push up corporate borrowing costs, making it more expensive for companies to refinance debt and fund acquisitions and capital expenditures. That could weigh on earnings as firms ramp up borrowing to finance artificial intelligence and data center investments.
Even so, higher Treasury yields could be beneficial for investors and fuel buying of debts of all sorts, once yields rise enough to make them more attractive. Investment-grade spreads are near historically tight levels, reflecting the strength of the biggest firms and the investment outlook — but signaling that investors have limited protection should credit conditions start to deteriorate.
Stock multiples
Stocks have often looked stretched on valuation during the bull market of the past few years, but they stand to face more competition from bonds with the rise of yields.
Albert Edwards of Societe Generale says in a recent commentary that the ratio of the 30-year U.S. Treasury yield to the dividend yield on stocks is at its highest since the dot-com bust of 2000 — which is part of why some investors think stock gains could prove fragile. Skeptics may question worries about dividend yields given the strength of earnings and the fact that few investors buying the technology stocks leading the market advance are doing so for dividends, but Edwards says that a highly valued market is a fragile one.
Though valuation "will not in itself trigger a bear market, it most certainly leaves the market more vulnerable to 'bad' news," Edwards said.
SPY•
