The United States economy continues to expand even as borrowing costs climb at a pace that has unsettled investors across markets. Treasury yields rose again on Friday, with the 10-year yield touching 5.230% at one point during the session — its highest level since June 2007. The 30-year yield moved above 5.51%, a threshold last reached in 2004, while shorter-dated debt followed a similar path, pushing the 2-year yield toward 4.90%.

Yields at levels would ordinarily raise concerns about weakening demand. Instead, the current rise has been accompanied by stronger consumption, robust business activity, solid manufacturing performance and large-scale investment in artificial intelligence.

The debate on Wall Street has shifted to why yields are climbing so quickly. Inflation remains one candidate explanation. Stronger economic output is another. Washington's growing borrowing needs are also drawing attention as federal deficits expand. Investors are uneasy because each explanation points toward rates staying elevated — the scenario traders describe as "higher for longer." The stakes reach beyond trading desks: Treasury yields act as the reference point for borrowing costs across the economy, from mortgage rates to corporate debt, so their trajectory shapes budgets for households and businesses alike.

Stocks have so far withstood the pressure. The S&P 500 held near record highs through September, and growth-oriented shares have outperformed many cyclical segments. That resilience comes as markets enter a quarter that has historically delivered some of the strongest equity returns of the year, although stretched valuations and the approaching U.S. midterm season add another layer of risk.

Fresh business data push growth back into the bond market debate

Economic figures released Wednesday gave the growth argument fresh momentum. A closely watched business survey from S&P Global (NYSE: SPGI) recorded a sharp improvement across U.S. companies. Its manufacturing measure posted its largest monthly advance since 2022, while services activity accelerated even further, reaching its strongest level since 2021, with new orders helping drive the gains.

The report typically attracts less attention than major inflation or employment releases. This time, traders took notice. Bond selling accelerated as investors weighed whether the economy may be gathering speed rather than cooling.

"The main reason that bond yields rose sharply is that the US economy is booming," said Ed Yardeni, chief investment strategist at Yardeni Research.

That view has also shaped trading within the stock market. If rates are rising because businesses and households are generating more demand — rather than because inflation is breaking out again — some investors see large technology companies as better positioned than economically sensitive sectors.

AI spending factors into that calculation. Tens of billions of dollars are flowing into chips, computing infrastructure, data centers and other AI-related projects, keeping growth-oriented shares in focus even as government borrowing costs climb.

Consumers keep spending as Fed officials track stronger demand

Household consumption has been among the most visible factors explaining why the economy has avoided a meaningful slowdown. Real consumer spending picked up to a 3.4% annualized pace in the second quarter, despite starting the year on a weaker footing. Estimates suggest consumption continued to expand in the third quarter. According to the Atlanta Federal Reserve's GDPNow model, a running estimate of U.S. economic output, consumer spending growth is tracking close to 4%.

Philadelphia Federal Reserve President Anna Paulson noted recently that economic conditions have remained strong despite tariff pressures and rising oil prices. She pointed to consumer demand, solid employment and a major cycle of AI investment as the defining elements of the current environment, adding that rising share prices should provide an additional boost to household consumption.

Cleveland Federal Reserve President Beth Hammack made a similar point during a Friday panel in Cleveland, saying that while several forces are affecting Treasury yields, stronger economic performance belongs on the list.

"I think that the growth numbers have come in in a pretty solid way," Hammack said. "I think that expectations of continued performance, if you look at earnings and profits for various public companies, they've been coming in above expectations, and there have been signs of resilience that I think the markets are starting to price in."

According to Hammack, the labor market remains near her definition of maximum employment. She also noted that markets are reflecting growing anticipation among traders of further Federal Reserve interest rate hikes. Still, she described the federal government's fiscal policy as unsustainable.

Consumers have repeatedly defied policymakers' expectations by refusing to pull back as much as forecast. "We've been expecting the consumer to step back for quite a number of years, and they really haven't," Hammack said. "They've continued to spend, and that's been fueling the economy."

Deficit concerns have not disappeared. Wil Stith, senior bond portfolio manager at Wilmington Trust, places more weight on politics in Washington than on recent growth figures. While acknowledging that economic growth has contributed to upward pressure on Treasury yields, his deeper concern lies with the government's side of the ledger: he attributes the rise in yields to excessive government spending and the budget deficit.

Which of those forces ultimately dominates the yield story — resilient private demand or fiscal strain — should become clearer as upcoming inflation and growth data arrive, alongside continued public commentary from Federal Reserve officials.