Defying Higher Bond Yields, Consumers Keep Spending and the Economy Keeps Booming

For much of the past year, the conventional wisdom on Wall Street has been straightforward: when bond yields rise, the economy slows. Higher yields mean higher borrowing costs for mortgages, car loans, credit cards and corporate debt. Those costs are supposed to squeeze household budgets, cool hiring and eventually drag growth back toward earth.

So far, the economy has not read the memo.

Despite a stubbornly elevated level of long-term interest rates, American consumers have kept opening their wallets, and the broader economy has kept expanding at a pace that has repeatedly surprised forecasters. The result is a familiar but still puzzling picture: a bond market flashing caution while the real economy hums along.

The disconnect

Bond yields reflect a mix of expectations about growth, inflation and the supply of government debt. When they climb, the traditional interpretation is that money is getting more expensive, and that tighter financial conditions will eventually bite.

But the transmission from yields to household behavior has proven far slower and weaker than many models assumed. A large share of homeowners locked in low fixed-rate mortgages during the era of ultra-cheap money, insulating their monthly budgets from rate moves. Many corporations did the same with their debt, terming out borrowing well into the future. That means the pain of higher rates arrives in installments rather than all at once.

Meanwhile, higher yields are not purely a headwind. Savers earning meaningful returns on cash for the first time in more than a decade have seen their interest income rise. For households with financial assets, that is a tailwind to spending, not a drag.

Why spending has held up

Consumer spending accounts for roughly two-thirds of U.S. economic activity, so its resilience largely explains why growth has stayed firm. A labor market that has continued to generate jobs and paychecks gives households the confidence — and the cash flow — to keep buying. As long as people believe they will still be employed next month, they tend to spend.

There is also a compositional story. Spending power in the U.S. is heavily concentrated among higher-income households, who are the least sensitive to borrowing costs and the most exposed to rising asset prices. When markets do well, those households feel wealthier and spend more, partially offsetting the strain felt further down the income distribution.

That divergence is one reason aggregate data can look robust even as surveys of consumer sentiment reveal widespread frustration. The averages mask real stress among borrowers who rely on credit cards, auto loans and other floating-rate debt, where higher rates show up immediately.

The risks ahead

None of this means the bond market is wrong — only that it may be early. Rate-driven slowdowns historically arrive with long and variable lags. Each year that passes, more homeowners move, more corporate debt matures, and more borrowers refinance into today’s higher rates rather than yesterday’s cheap ones.

The key variable to watch remains employment. A boom built on confident consumers is durable as long as paychecks keep coming. If hiring stalls, the cushion of savings and locked-in low rates may prove thinner than it looks.

For now, though, the economy is doing something economists rarely enjoy explaining: growing briskly in conditions that were supposed to stop it. The gap between what the bond market implies and what consumers are actually doing has become one of the defining features of this expansion — and closing that gap, in either direction, will be the story that determines where growth goes next. Read More