Over the past 10 months, the yield on the 10-year U.S. Treasury has increased by 50%. And the U.S. Federal Reserve expects to increase interest rates two more times this year.
10-Year U.S. Treasury Yield: Why Does It Matter?
Why do 10-Year U.S. Treasury yields matter? The yields on 10-Year U.S. Treasuries matter because interest on most debt instruments is based on the 10-Year U.S. Treasury.
As interest rates rise, companies will not borrow at the rate they used to. And their cost of maintaining their current debt (their interest expense) will rise sharply; in many cases, doubling. This hurts bottom-line profits and, of course, stock prices.
Corporate America and the government have borrowed and spent like drunken sailors. While corporate America has borrowed billions of dollars to buy back shares in their own companies, the government keeps spending more than it brings in.
In 2008, $41.8 billion of junk bonds were issued in the United States. In 2016, this amount was $236.9 billion. That’s an increase of 467% in a matter of eight years! (Source: “U.S. Corporate Bond Issuance,” Securities Industry and Financial Markets Association, last accessed May 15, 2017.)
Total U.S. corporate bonds issued in 2008 amounted to $710.6 billion. In 2016, it was $1.51 trillion.
And, of course, federal government debt has gone from $10.0 trillion in 2008 to $20.0 trillion today.
Interest Rates the Root of Economic Strain
Our world became addicted to cheap interest rates. Now that rates are rising, it will put a strain on our economy. Aside from corporate America and governments paying sharply higher interest rates, American consumers will be paying more interest on their credit card balances, their car loans, their mortgages, and their other debts. These are real strains on American consumers, whose spending makes up two-thirds of our gross domestic product (GDP).
Chart: 10-Year U.S. Treasury Yield
I will leave you with a chart of the yield on 10-Year U.S. Treasuries. Now, imagine how that chart will look after two more Federal Reserve interest rate increases. It won’t be a pretty picture for our economy.
Chart courtesy of StockCharts.com