How highest bond yields in 16 years could chill hot US economy

Add surging interest rates to the list of threats staring down the U.S. economy.

- Amara Omeokwe

The yield on the U.S. 10-year Treasury note touched 5% on Monday for the first time in 16 years, after climbing rapidly in recent weeks. That is among many borrowing costs including for other long-term government debt, mortgages, credit cards, auto purchases and business loans-that could slow the surprisingly resilient economy.

Rising rates come on top of other potential impediments for the economy. Those include the possibilities of the conflict in the Middle East raising energy prices, prolonged labor strikes resulting in wider job losses and a partial government shutdown next month.

Meanwhile, higher yields lift borrowing costs for the U.S. government, amid ballooning federal budget deficits and debt.

The economy has remained strong over the past year, despite the Federal Reserve sharply raising short-term rates to combat inflation by moderating economic activity. If higher long-term rates persist, they could increase the risks of a broader and deeper downturn rather than a hoped-for soft landing, in which inflation cools without a recession.

"The fear in the market is that we get surprises of everhigher yields," said Roger Aliaga-Díaz, chief economist for the Americas at Vanguard. "We still believe we're not out of the woods yet in terms of a recession call."

Higher rates could crimp consumer spending, which has powered the economy this year alongside a strong job market. Hiring jumped and the jobless rate held at historically low levels during September, according to the Labor Department. Americans extended their summer spending spree at retailers into last month, separate data showed.