The yield on the benchmark 10-year Treasury has surged past 5%, a level not seen since 2007. The abrupt increase, experts think, was fueled by Fed Chair Jerome Powell's warnings of persistently high inflation.

On Thursday, Powell admitted that the resilient economy and labor market keep inflation above target, yet he thinks further central bank intervention might not be necessary.

“I do think that (Powell’s) comments today are definitely a big factor behind the move to 5%,” said Noah Wise, portfolio manager for Allspring Global Investments.

“He highlighted what everyone has seen with the strong economic growth data and the retail sales figure that came out. He also signaled that he is fine with tightening coming as a result of longer end rates going higher, even if it means that the shorter end rates don’t need to go as high.”

In other words, the Fed seems content letting the market do its heavy lifting.

Longer-term inflation and interest rate expectations

The surge in Treasury yields is closely tied to investors' long-term inflation expectations. That essentially means the market is betting that inflation is likely to stick around—even on a longer time horizon.

Another big reason for the yield increase is attributed to the so-called "term premium." In simple terms, investors are demanding higher returns when lending their money to the government for ten years.

One of their concerns is that America’s mounting debt could become an issue down the road.

“I see the 5% as a psychological threshold but I’ve been telling my clients for over a year that we are in a higher for longer environment, that inflation is going to stay around, higher than it has in the past, and with it interest rates also,” said Michael Schulman, partner and CIO for Running Point Capital Advisors.

Impact on mortgages, loans, and savings

As the 10-year yield surges, it triggers a domino effect across the lending sector.

Even though many consumer loans are fixed, individuals taking out new loans will inevitably face higher interest costs. This presents a formidable challenge for new homebuyers as mortgage rates continue to rise.

According to Freddie Mac, the average 30-year fixed-rate mortgage currently stands at 7.63%, making homeownership even less affordable.

“For those who are planning to buy a home, this is really bad news,” said Eugenio Aleman, chief economist at Raymond James. “Mortgage rates will probably continue to go up and that will push affordability farther away.”

Moreover, student loans are intricately tied to Treasury yields. As a significant expense in most individuals' lives, a college education often relies on borrowed funds.

Undergraduate students taking out new direct federal student loans for the 2023-24 academic year are now encountering a rate of 5.50%, up from 4.99% in the previous year. These rates are determined annually based on the 10-year Treasury.

If this yield remains above 5%, federal student loan interest rates could surge further, imposing additional costs on students.

Auto loans are similarly affected, with the average rate on a five-year new car loan currently standing at 7.62%, the highest in 16 years. This, coupled with the rising cost of vehicles, makes monthly payments a burden for many consumers.

But higher rates do have a silver lining.

Savers stand to benefit from higher yields as deposit rates become more attractive. High-yield savings accounts, certificates of deposit, and money market accounts now offer returns exceeding 5%, providing savers a welcome respite.