What are the impacts of US long-term interest rates remaining in the 5% range on the global economy?

The arrival of US long-term interest rates (10-year Treasury yield) in the 5% range means that the benchmark for the “risk-free rate” in global financial markets is shifting to a higher level. This is not just about higher interest rates; it has profound implications for the revaluation of asset prices and global capital flows.

The primary effects (impacts) on the US and global economies are as follows.

1. Impact on the US economy

Cooling of the housing market and consumer loans

• Surging mortgage rates: The 30-year fixed mortgage rate, which is linked to the 10-year Treasury yield, rises to over 7% or near the 8% range, significantly curbing the purchasing power of buyers.

• Curbing personal consumption: Rising interest rates on credit cards and auto loans increase the interest payment burden on households, acting as a factor in the slowdown of personal consumption.

Increased corporate financing costs and selection of capital investment

• Debt refinancing pressure: Companies facing the refinancing of corporate bonds issued during past periods of low interest rates will see their interest payments jump.

• Strict selection of investments: Because the hurdle rate for financing rises, new projects and capital investments with tight profitability margins are being held back. On the other hand, there is a growing trend for capital to concentrate in sectors where growth rates significantly exceed interest rate levels, such as AI-related fields.

Increased interest payment burden for the US Treasury and fiscal pressure

• The interest payment costs for US Treasury bonds are surging, putting pressure on national finances. There are concerns about the risk of a vicious cycle (debt spiral) where the expansion of the fiscal deficit further increases the issuance of government bonds, which in turn pushes yields even higher.

Valuation adjustment pressure on the stock market

• When a 5% yield can be secured on government bonds, the appeal of taking risks to invest in stocks relatively declines. Downward pressure on stock prices is likely to be exerted, particularly on large-cap tech stocks with high P/E (price-to-earnings) ratios.

2. Impact on the global economy

Historic dollar strength (dollar buying) and weakness in other currencies

• As the appeal of US Treasury bonds increases, capital flows into the US from all over the world, and the dollar strengthens.

• In other countries (especially Japan and Europe), their own currencies are weakening (yen depreciation, euro depreciation, etc.), and concerns about “import inflation” caused by rising import prices are increasing.

Capital outflows from emerging countries and default risk

• Withdrawal from emerging markets: Investors are accelerating moves to avoid risks in emerging markets and return capital to safe and high-yielding US Treasury bonds (capital flight).

• Increased burden of dollar-denominated debt: For emerging market companies and governments that have borrowed in dollars, the double punch of a strong dollar and high interest rates increases repayment costs, raising the risk of default.

Constraints on interest rate cuts and forced rate hikes by central banks in other countries

• Financial authorities in emerging markets, Europe, and Japan are forced into difficult policy decisions where they cannot easily cut interest rates (or are pressured to follow with rate hikes) even if their domestic economies are deteriorating, in order to prevent inflation and capital flight caused by the depreciation of their own currencies.

3. Positive aspects and market perspectives

• Recovery in income gain demand: For pension funds and individual investors, an environment where a reliable yield in the 5% range can be obtained from near-risk-free US Treasury bonds provides stable investment returns.

• A reflection of economic resilience: The background to yields rising to 5% also includes the aspect that the US economy is strong enough to withstand interest rate hikes (no landing), and there is a positive view that if economic expansion continues, growth in corporate earnings will absorb the interest costs.