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Why the Fed isn't entirely to blame for current high interest rates on loans


If you're looking to take out a loan right now, you've probably noticed it's gotten even more expensive. The Federal Reserve has raised rates 11 times since March of last year. But there's something else that affects mortgages, car loans or credit card fees. And that's the 10-year Treasury bond. Wailin Wong and Adrian Ma from The Indicator From Planet Money explain.

WAILIN WONG, BYLINE: You can think of U.S. Treasury bonds as hanging out on something we call the yield curve. On the front end of the yield curve, you've got Treasurys that come due in a year or less. And then on the back end, you've got the Treasurys with longer maturities - like the 10-year.

ADRIAN MA, BYLINE: Mike Cudzil is a portfolio manager at the investment firm PIMCO. And he says the part of the yield curve where the 10-year Treasury hangs out is usually kind of sleepy, but not lately.

MIKE CUDZIL: It's as interesting as it's been in the last 10 or 15 years, certainly. This type of move doesn't happen that often in the back end of yield curves.

WONG: The move that Mike is talking about is this rapid increase in the 10-year yield. This number has been climbing to levels not seen in years. It even, for the briefest of moments, went over 5% last month. And that means returns on bonds, which are usually a bit ho hum are now kind of spicy. Now, there's this piece of financial jargon that's gotten bounced around a lot in the last few weeks as investors are trying to puzzle over the 10-year Treasury. The jargon is term premium. Mike says this is a wonky way to describe how people holding longer-dated bonds need to be compensated for that risk.

CUDZIL: Term premium is just this idea that you should get paid more, you know, the longer period of time you lend someone money.

WONG: So think about lending money to someone for one month versus five years. It's a lot harder to know what will happen in the next five years.

MA: So in the bond markets, investors who are buying 10-year Treasurys are demanding a certain extra return to compensate them for that uncertainty. And there's a lot of uncertainty at the moment. This concept of term premium has kind of become this little box that investors can stuff with all their anxieties.

WONG: Anxiety No. 1, the federal deficit and the U.S. government's voracious appetite for debt. So the government is planning to borrow historically large amounts of money in the upcoming months, and it borrows money by issuing U.S. Treasury bonds.

MA: Now, the rate of return on those Treasurys will have to be high enough to attract buyers. And if there's not enough demand for all these Treasurys, yields will have to go up.

WONG: OK. I got anxiety No. 2. Government bonds in countries like Japan are also offering higher returns right now. That means U.S. Treasurys have some competition. And they might have to start offering higher yields to tempt investors.

MA: But neither of these factors, whether we're talking about U.S. government borrowing or high returns overseas, really do it for Mike. He says to explain the increase in the 10-year Treasury yield, we should really be looking at the strength of the U.S. economy.

CUDZIL: This has kind of been the most forecasted recession ever by economists, and it hasn't happened.

WONG: The latest numbers showed that GDP grew more than expected in the third quarter. Unemployment is still hovering near a historic low. Mike says this resilience means that the Fed can keep interest rates where they are for longer.

MA: So the 10-year yield is reflecting these expectations that higher interest rates are here to stay. And, yeah, higher interest rates have led to more expensive mortgages and auto loans. But Mike says if the economy is able to handle these higher interest rates, that is actually a positive sign.

WONG: Wailin Wong.

MA: Adrian Ma, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

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Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.
Adrian Ma
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.