Defying higher bond yields: Consumers keep spending and the economy keeps booming

Key Points:

• The 10-year Treasury bond yield has risen to 5.2%, its highest level in nearly 20 years, driven largely by a booming U.S. economy alongside factors like sticky inflation, higher oil prices, and significant federal debt.
• Economic indicators such as the S&P purchasing managers' index, strong labor market data, and robust consumer spending suggest continued economic resilience and growth momentum despite tariffs and rising energy costs.
• Federal Reserve officials acknowledge the economy's strength as a key factor pushing yields higher and foresee further interest rate hikes to manage inflation, with markets pricing in additional rate increases in October and December.
• Some experts argue that high government spending and fiscal deficits are major contributors to rising bond yields, and caution that yields could surpass 5.5%, potentially prompting more aggressive Fed actions that might slow economic growth.
• Uncertainty remains about the effectiveness of higher rates in curbing demand and inflation, with some voices suggesting that structural changes in the economy, such as investment driven by AI and energy demand, may limit the Fed's traditional tools.