El-Erian warns high Treasury yields could trigger lasting economic shift

U.S. Treasury yields have climbed to levels not seen since 2007, with the 30-year note at 5.27%, the 10-year at 4.74% and the five-year at 4.43%, according to recent market data. Economist Mohamed El-Erian, writing in The New York Times, warned that continued bond-sell pressure could mark the start of a "structural economic shift" that would increase the share of federal revenue devoted to debt service to nearly 20%, reducing funds available for other priorities such as defense and health care.

El-Erian noted that the rise in yields reflects higher real yields—inflation-adjusted compensation demanded by investors—rather than runaway inflation. He cited strong borrowing by large technology firms building AI data centers, which have issued roughly $500 billion in bonds this year and are expected to add another $300 billion by year-end, according to Goldman Sachs data. While he hopes AI investment will boost productivity, he cautioned that the transition requires careful management and that rate hikes alone may not curb corporate demand.

The economist also highlighted external pressures, pointing to Japan’s weakened yen and the risk of Japanese investors selling U.S. bonds to support their currency, prompting the Treasury to intervene in foreign-exchange markets.

Higher yields are already influencing broader markets, with the dollar weakening and investors shifting toward assets such as gold and Bitcoin. Although Freddie Mac reported a slight dip in the 30-year mortgage rate to 6.65%, El-Erian warned that rising borrowing costs could hit low-income households hardest, limiting first-time homebuyers and increasing transportation expenses.