MNI INTERVIEW: Rising Yields Pose Biggest Risk To US Jobs
MNI (WASHINGTON) - A sustained rise in Treasury yields poses the biggest risk to the U.S. labor market, which has cooled gradually over the past year but should otherwise continue performing well in 2025, Yongseok Shin, economist at Washington University in St. Louis and research fellow at the St. Louis Fed, told MNI.
Ten-year Treasury yields have climbed about a percentage point to 4.6% since the Federal Reserve started cutting interest rates in September, both because economic data are surprisingly strong but more worryingly also due to mounting concern over the rising deficit.
The Congressional Budget Office last week projected the federal debt to hit 118% of GDP in 2035, surpassing its previous record of 106% in World War II, as President Donald Trump cuts taxes and borrows trillions more.
"Term premiums have been increasing, and that's something I am cautious about. If bond market participants decide there's a lack of fiscal space and it's trouble, I would be scared about how fast the bond market can turn," Shin said in an interview.
"That will be very damaging to the hot tech sector and other parts of the economy. High rates are difficult for everyone."
VIGILANTES RETURN?
Models suggest investors increasingly perceive longer-run Treasuries as riskier than before, driving yields higher. The term premium, the compensation investors demand for taking on risks related to growth, inflation and political uncertainty, has accounted for most of the rise in yields in recent months – and analysts say the trend could continue.
"If borrowing costs spike, causing a recession, the Fed would see a need to cut rates to stimulate the economy, but doing so fuels expectations of future inflation and more government deficits, and that in turn could have the unwanted effect of further lifting yields," Shin said.
"People's perceptions of the fundamentals could change quickly. And another 100bp bump higher would have a really negative effective on the economy." (See: MNI INTERVIEW: Lockhart Sees Fed On Hold 'Til At Least Midyear)
NEUTRAL LABOR MARKET
Expectations of a hotter economy can also drive yields higher, as illustrated by the blockbuster December jobs report that immediately prompted discussion of interest rate hikes rather than cuts this year.
Shin said the labor market is in a "good equilibrium" amid solid hiring, low layoffs, a decline in the quits rate and signs that employers are gaining bargaining power. The economy created an average of 186,000 jobs last year and the unemployment rate has stayed low at 4.1%. The number of people quitting jobs declined by 218,000 in November, the latest month of data available, an indication of workers' reluctance to leave.
"Businesses are calling workers back to the office knowing some won't return, because they feel they can replace them more easily. Fewer workers quitting is also an indication of the balance of power shifting," Shin said.
"The labor market may weaken a bit in the next several months. I’m not sure it’s super strong, but it’s more balanced, more neutral."