Here's what happens to the economy when Treasury yields soar like they are now

• Mortgage rates have risen to 7.26%, up a full point over the past year, while credit card rates face upward pressure as the prime rate increases alongside Fed hikes
• Consumers, who drive nearly 70% of economic activity, will face higher borrowing costs that far outweigh modest gains in savings account yields (currently around 0.37%)
• Small and medium enterprises face the greatest credit squeeze, while even bank stocks declined despite typically benefiting from higher rates due to concerns about slowing loan demand

Market Summary: Treasury Yields Surge, Threatening Economic Growth

Key Developments

Treasury yields jumped sharply Wednesday, with the 10-year note hitting 5.125%—the highest level since before the 2008 financial crisis. The 2-year note climbed over 13 basis points past 4.9%. The surge reflects higher inflation pressures, weak demand at a 5-year Treasury auction, expectations for another Federal Reserve rate hike in October, and competition from hyperscaler debt issuance.

Economic Impact

The rising yields pose significant threats to consumers, who drive nearly 70% of U.S. economic activity and hold approximately $19 trillion in total debt. Mortgage rates have reached 7.26%, up over a full percentage point year-over-year. Credit card rates and other consumer borrowing costs are expected to rise further, as higher yields feed into the prime rate (currently 7%).

Higher borrowing costs are likely to dampen consumer spending, auto purchases, and housing demand, potentially slowing the $32 trillion U.S. economy. Small and medium enterprises face particular challenges due to reduced credit availability.

Limited Benefits

While savers will see marginally higher returns on bank accounts (currently around 0.37% on savings), these gains are unlikely to offset increased borrowing costs. Banks may benefit from wider lending margins, though bank stocks fell Wednesday on concerns about reduced loan demand. The KBW Bank Index declined 0.93%.

Market Context

The Atlanta Fed is tracking 5.1% GDP growth for Q3, which may be contributing to yield pressure. Treasury Secretary Scott Bessent's liquidity efforts and buyback programs for longer-dated debt have failed to stem the rise in rates thus far.