The yield on 10-year US bonds for the first time in the last 16 years exceeded 5% due to expectations that the Federal Reserve System will maintain interest rates at a high level for a long period of time, reports the Associated Press agency with reference to Agerpres.

On Monday, the yield on the 10-year US Treasury rose nine basis points to 5.01%, the highest since 2007.

Federal Reserve Chairman Jerome Powell suggested last week that Fed officials were leaning toward leaving interest rates unchanged at the November meeting, but remained open to the possibility of another hike in borrowing costs if the U.S. economy raises inflationary risks.

“From an economic point of view, 5% is just another number. But for investors, this is a signal,” says Daiwa Capital Chief Economist Chris Skikluna.

U.S. bond yields have risen sharply, with the yield on the 10-year bond rising from less than 3.50% in the spring to just 0.50% at the start of the pandemic. This increase means that the US government must pay higher interest rates to borrow from investors and cover its budget.

How US bond yields affect the rest of the world

The rise also has a direct impact on people around the world, as the returns earned by investors on 10-year US Treasuries are central to the global financial system and help set prices for all types of loans and investments.

In addition to making it more expensive for Americans to buy a home with a mortgage, higher yields on U.S. government bonds are putting downward pressure on the prices of a variety of investments, from stocks to cryptocurrencies.

Even for the best-rated companies, the interest rates at which they borrow are set by adding additional interest above the rate at which the US government borrows. Borrowers with lower ratings must pay higher interest rates compared to those who are considered to have a better chance of repaying their debts.

US Treasuries are considered one of the safest investments

Higher U.S. government bond yields mean more investment abroad, and the 10-year U.S. Treasury bill is considered one of the safest investments on the planet, meaning investors will move their currencies into U.S. dollars.

The US dollar has gained 4% against the euro and 5% against the pound sterling since the end of July.

Also, while a stronger dollar helps American tourists buy more while abroad, it can create additional financial pressures and accelerate inflation in other countries, especially developing countries.