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

The 10-year Treasury yield has reached its highest level since 2007, causing uncertainty in the economy. This rate is the benchmark for many other loans and affects borrowing costs across the board. The Federal Reserve raised rates for the first time since 2023, aiming to control inflation, with a 70% chance of another hike in October. Bonds have been selling off, and demand for five-year treasuries was the weakest since 2018.

Yields rise mostly due to two reasons: a booming economy or investors losing interest in U.S. debt. A bond is an IOU, and when you buy a Treasury, you lend the government money, receiving interest in return. As demand for bonds decreases, the yield increases. The yield also indicates investors' expectations for the Federal Reserve's future actions and the "term premium," an extra payment for tying up money long-term.

Some argue that the rising yields signify a strong economy driven by AI investments, with tech giants planning to spend nearly $800 billion on capital expenditures this year. This robust growth could continue, allowing stocks to handle higher yields. However, others are concerned about the term premium potentially climbing due to the growing deficit, geopolitical tensions, and AI spending exceeding available cash.

Without a slowdown in AI spending or resolution of the Iran war, these factors may keep yields high, indicating a more pessimistic outlook for the economy.