Higher Borrowing Costs Risks Burning a Hole Through Consumer Wallets

This is a mission that calls for a different type of bond. Bring in… Bond. Treasury Bond. But this one’s a double agent, having recently turned against the world. In the past week, the 10-year US Treasury yield crossed 5% twice, its highest in 16 years.

This meteoric rise follows three decades of near-zero interest rates, which ended last year as the Fed began raising rates to tackle inflation. But history hasn’t always been kind to stocks (and the economy) when bond yields reach these levels.

• According to Jefferies, the S&P 500 tends to underperform when its trailing 12-month earnings yield is below the 10-year treasury yield, which is just over 5%.
• Yesterday, Bill Ackman said he cashed out his bet against bonds: “There’s too much risk in the world to remain short bonds at current long-term rates.”

The real cost of inflation

The 10-year treasury yield heavily impacts interest rates on loans like mortgages, student borrowing and credit cards. Pair that with the return of student loan payments, and consumers might run into some problems.

“When 30-year mortgages and car loans cost you 8%, it will impact consumer behavior,” Blackstone President Jonathan Gray said (FT). The realities of higher borrowing costs are already coming into view:

• 30-year fixed mortgage rates have risen over 8%, taking the average monthly payment on a US home above $3K before taxes and fees.
• According to Bankrate, the average personal loan interest rate rose to 11.43% in mid-October, with rates as high as 32% for subprime borrowers.

Livin’ in a Fed’s world: The S&P 500 is up 10% year-to-date, hardly indicative of a doomsday scenario. But Gray echoed that maintaining this policy will push the economy to the edge — already visible through mortgage demand hitting its lowest point since 1995 and credit card debt setting all-time highs. However, with many barometers of economic performance trending positive, it’s hard to know if or when his prediction will play out.