Higher bond yields, tariffs, and a spike in energy prices haven’t been enough to slow the economy down.
This week, the yield on the 10-year Treasury bond — which influences mortgage rates and other borrowing costs — rose to 5.2%, marking its highest level in nearly 20 years.
While analysts and economists have pointed to a cocktail of sticky inflation juiced by higher oil prices, demand for AI companies’ bonds, and a record $40 trillion federal debt, a debate has emerged about how much of the rise in yields is being driven by a strengthening economy — and how much the economy can take.
“The main reason that bond yields rose sharply is that the US economy is booming,” said Ed Yardeni, chief investment strategist of Yardeni Research.
This week, a report that generally garners little attention, the S&P’s purchasing managers’ index, showed the economy could be picking up steam. The report, which measures manufacturing activity, registered its biggest monthly increase since 2022, while a reading on the service sector jumped to the highest level since 2021, powered by new orders.
The labor market is showing similar resilience. August payrolls jumped by 162,000, while the unemployment rate held steady at 4.1%. Until this spring, healthcare and social assistance had largely carried the labor market. Since then, hiring has broadened to include a wider range of industries, and over the summer, total job gains averaged a solid 74,000 per month.
Top Federal Reserve policymakers view consumer strength as a primary driver. Federal Reserve Chairman Kevin Warsh noted at a recent press conference that economic strength is the primary driver of long-term yields.
In a panel on Friday, Cleveland Federal Reserve president Beth Hammack said a number of factors are driving up yields, pointing to a strong economy as a key one.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“I think that the growth numbers have come in in a pretty solid way,” she said on the panel in Cleveland. “I think that expectations of continued performance, if you look at earnings and profits for various public companies, they’ve been coming in above expectations, and there have been signs of resilience that I think the markets are starting to price in.”
She acknowledged that markets are pricing in more interest rate hikes and that the US is on an unsustainable fiscal path.
Philadelphia Federal Reserve president Anna Paulson also said this week that she sees a resilient economy that’s showing some signs of increased momentum despite tariffs and higher oil prices. She noted that consumer spending has been strong, the AI build-out is driving investment, and the labor market is stable.
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