Recent tumultuous movements in the bond market have sent shockwaves through the financial world, igniting fears of an impending recession and triggering concerns about housing, banks, and the fiscal health of the U.S. government.

At the heart of this financial turbulence is the 10-year Treasury yield, a figure of paramount importance in the world of finance. Representing the cost of borrowing for bond issuers, this yield has been on an upward trajectory in recent weeks, surging to 4.8% on Tuesday. This level hasn’t been seen since the eve of the 2008 financial crisis, rattling investors and economists alike.

The relentless climb in borrowing costs has defied the predictions of financial experts, leaving Wall Street searching for explanations. Despite the Federal Reserve’s 18-month campaign of raising its benchmark rate, the impact on longer-dated Treasurys like the 10-year remained subdued until recently. Investors had anticipated imminent rate cuts, but this perception shifted as economic indicators signaled unexpected strength.

July marked a turning point, with signs of economic resilience challenging expectations of a slowdown. In the weeks that followed, Fed officials remained resolute in their stance on elevated interest rates. While some attribute the yield’s surge to technical factors, including sizable selling by a particular entity or institution, others are deeply concerned about the escalating U.S. deficit and political discord. A third viewpoint suggests that the Fed intentionally orchestrated the yield surge to cool down an overheated U.S. economy.

The 10-year Treasury yield holds unparalleled significance in global finance due to its influence on various aspects of the economy. While shorter-term Treasurys are more responsive to Fed policies, the 10-year yield is shaped by market forces and reflects expectations regarding growth and inflation. It profoundly affects consumers, corporations, and governments, impacting trillions of dollars in home and auto loans, corporate and municipal bonds, commercial paper, and currency exchange rates.

The recent surge in this yield has left the stock market teetering on the edge, as conventional correlations between asset classes have unraveled. Stocks have been selling off since the yield’s ascent began in July, erasing a significant portion of the year’s gains. Remarkably, U.S. Treasurys, typically considered a safe haven during market turmoil, have fared even worse, with longer-dated bonds witnessing a 46% decline since their peak in March 2020.

Beyond the realm of investors, the real impact on most Americans is yet to be fully felt, particularly if interest rates continue their upward trajectory. The surge in long-term yields benefits the Fed in its battle against inflation by tightening financial conditions and deflating asset prices. This, in turn, could lead to reduced demand as consumers cut back on spending or face job losses. Credit card borrowing has surged as consumers deplete their accumulated savings, resulting in the highest delinquency rates since the onset of the Covid pandemic.

Lindsay Rosner, head of multi-sector investing at Goldman Sachs asset and wealth management, warns that “Unfortunately, I do think there has to be some pain for the average American now.” This pain could extend to employers as well, potentially impacting a robust economy. Companies reliant on high-yield debt, including many in the retail sector, will encounter significantly higher borrowing costs. Additionally, higher rates could exert pressure on the housing market and push commercial real estate closer to the brink of default.

While the 10-year yield has paused its ascent in recent trading sessions, the rate remains at 4.71% on Thursday, ahead of a crucial jobs report. Many experts believe that yields could continue to climb higher, given that the factors driving the surge have not abated.

This scenario has raised concerns about the U.S. facing a debt crisis, where higher rates and ballooning deficits become entrenched. The looming possibility of a government shutdown adds to these worries.

JPMorgan’s Bob Michele warns, “If we get over 5% in the long end, this is legitimately another rate shock,” which could trigger further economic turmoil. As the yield’s trajectory remains uncertain, the financial world watches closely for signs of vulnerability in various sectors.