Updated Sep 28, 2023 - Economy

The big implications of soaring real rates

Data: Federal Reserve; Chart: Axios Visuals

The bond market's remarkable moves this month imply a stronger economic growth path in the years ahead — but they happened without much evidence of changing fundamentals.

The big picture: Bond prices have abruptly moved to levels that imply the high-pressure economy of the last couple of years will persist.

  • The rise in interest rates since May, which accelerated this month, has been driven by higher real yields. In other words, the bond market is not pricing in higher inflation but rather a persistently hot economy.

Why it matters: Financial markets — based on their current pricing, at least — believe that the secular stagnation era of the 2010s, with its low rates, low inflation, and persistently weak demand, is well and truly finished.

Yes, but: The recent moves will pound interest-sensitive sectors that have already been reeling. Commercial real estate, banks with longer-term securities on their balance sheets and prospective home buyers all lose.

  • It's also bad news for the U.S. government's fiscal situation, with large deficits forecast as far as the eye can see that will now be more expensive to finance.

By the numbers: The yield on five-year inflation-protected Treasuries reached 2.47% Thursday morning, a new 15-year high. It was 1.07% in April and in negative territory as recently as mid-2022.

  • The 10-year Treasury yield reached 4.64% Thursday morning. Mortgage rates are hitting new multi-decade highs, with the 30-year fixed rate reaching 7.65% on Wednesday, per Mortgage News Daily.

The intrigue: Economic data the last couple of months has been solid and largely consistent with forecasts. It's not like there has been something in the growth or inflation numbers that would trigger a radical rethinking of the medium-term outlook.

  • And while the most recent rate surge trigger was new forecasts out of the Federal Reserve last week suggesting the central bank will keep its target somewhat higher in 2024 than previously anticipated, it wasn't the kind of adjustment that would explain the scale of long-term rates moves since then.

What they're saying: "It's a subtle difference, and long rates are moving quite a lot," Chicago Fed president Austan Goolsbee said Thursday morning at an event at the Peterson Institute for International Economics.

  • "Is there some strange thing going on in the marketplace, some liquidity issues? I'm still trying to chew on that."
  • However, "long rates heavily influence economic decisions," he said, and "if that continues we will have to take that into account as a form of financial conditions and monetary tightening."
Go deeper