Michael Nagle/Bloomberg
The bond market just crossed a threshold it hasn’t touched in nearly two decades. The 10-year Treasury yield jumped 14 basis points on Wednesday to reach 5.12%, while the 5-year yield climbed above 5% for the first time since 2007. The 30-year yield, meanwhile, hit a 19-year high, landing right back at levels last seen in June 2007.
That date isn’t a coincidence worth glossing over, according to Bloomberg Opinion columnist John Authers, who co-wrote a column that same month in 2007 warning that cheap money was ending. Weeks later, two Bear Stearns hedge funds collapsed, an early tremor of the financial crisis that would engulf global markets the following year. “Money just seems too cheap. Bond yields are not high by historical standards, but the suddenness of their move might dislodge the financing that underpins stocks,” Authers and his co-author wrote back then, a warning that reads uncomfortably well today.
The current move higher has several identifiable drivers. Hawkish comments from Federal Reserve Governor Michael Barr on further policy adjustments have pushed yields up, alongside stubbornly high oil prices and stronger-than-expected purchasing managers’ index readings, both signs of persistent inflationary pressure that make the Fed less likely to cut rates aggressively.
Layered on top of that is a fiscal backdrop that wasn’t in play in 2007: the U.S. national debt crossed $40 trillion for the first time just weeks before this latest leg up in yields. Higher yields mean higher borrowing costs on that debt, creating a feedback loop where rising rates make the fiscal picture worse, which in turn can put further upward pressure on the yields investors demand to hold U.S. government debt.
Whether this rhymes with 2007 or simply echoes it without repeating the same ending is the open question hanging over markets. The mechanics driving yields higher today, hawkish central bank rhetoric and inflation data rather than a credit bubble unwinding, are different from what preceded the 2008 crisis. But the speed of the move, and the fact that the last time yields sat at these levels the financial system was quietly cracking beneath the surface, is exactly the kind of historical echo that keeps bond traders up at night.
