Interest Rates Hit New Highs, Pinching Borrowers

(KNSI) – For the first time since 2007, the 10-year U.S Treasury bond yield is above 5%.

KNSI spoke to St. Cloud State Economics Professor King Banaian on Monday. He says it is due to a combination of factors. “How much of this is Treasury operations versus strength of the economy versus [the] Federal Reserve is an open question, but there’s at least three different explanations available to you for what’s going on right now.”

Banaian says Federal Reserve Chairman Jerome Powell continues to signal that rates will be higher for longer, and market participants are beginning to believe him. He also says better-than-expected economic data supports the message.

Lastly, Banaian says Washington is spending more than it is taking in, which means a lot of debt issuance. A higher guaranteed return is needed to induce people to fund all that borrowing.

The move is affecting mortgage rates as well. Now near 8%, it still might not be enough to bring down home prices from near-record levels. Banaian says that the surge in borrowing costs is restricting supply.

“You have basically these golden handcuffs on existing homeowners who refinanced their mortgages at 3% and now are being told they have to go to the sevens or maybe even the eights if they want to move, or something. So, that’s a real problem.”

He says the issues in the existing home market are supporting homebuilders by putting a floor under new construction even as rates surge higher. While there are signs that people are falling behind on car payments at an increasing rate, home foreclosures remain below pre-pandemic levels.

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