Boom or bust? The case for and against panicking about 5% yields

The most important number in the economy has hit its highest level since 2007, and Wall Street can’t decide if this is good or bad.

That number is the 10-year Treasury yield, the interest rate that the U.S. government pays to borrow money for a decade and on which almost every other loan in the country is predicated. It hit 5.21% on Friday, and the average 30-year mortgage rate jumped to 7.45% alongside it; car loans, credit cards, and business loans will follow.

This happened after the Federal Reserve raised rates last week, its first hike since 2023, to cool off the economy, with markets seeing roughly 70% odds of another hike in October. 

Bonds kept selling off, and Wednesday’s auction of five-year Treasuries drew the weakest demand since 2018.

Whether that’s a problem, though, depends on why it’s happening. Yields can rise mostly for two reasons: because the economy is booming or because investors are losing their taste for U.S. debt. Economists are split on which explanation applies here.

What is a bond anyway?

It’s helpful to go back to the basics of bond dynamics. A bond is an IOU; when you buy a Treasury, you lend the government money, and it pays you interest on that loan. That rate of interest is the bond........

© Fortune