Fed’s Bid to Avoid Recession Tested by Yields Nearing 20-Year Highs

The Federal Reserve may be putting its hoped-for soft landing of the economy at risk by tacitly accepting a run-up in long-term interest rates to the highest levels since 2007.

The surge — 10-year Treasury yields rose more than half a percentage point the past month to surpass 4.7% — heightens the danger in the near-term of a financial blowup akin to the regional bank breakdown in March. Longer run, it threatens to undercut the economy by markedly raising borrowing costs for consumers and companies.

“Ultimately, the feedback effect starts to fuel fears that you’re going to have a hard landing,” said R.J. Gallo, a senior portfolio manager for Federated Hermes, with about $669 billion in assets under management.

What may have a particularly strong impact is the rise in so-called real rates, which remove the impact of inflation. Yields on 10-year inflation-linked Treasuries have soared in recent weeks to levels rarely seen over the past two decades.

Long Term Real Yields Have Soared