Why Treasury Yields Are Rising, and What That Means for the Economy

Investors are worried about the amount of debt the government has piled up, and bond yields are one key indicator showing this.

Yields, or interest rates, on bonds can rise when investors rush to sell them. And they’re selling them at a rapid clip. Yields on the 30-year Treasury rose above 5.3 percent — a nearly two-decade high — fueled by anxiety over the war in Iran, inflation, unstable government deficits and rampant spending on artificial intelligence.

The nearly $32 trillion market for U.S. government bonds, called the Treasury market, offers a clear signal of where the economy may be headed. Yields on bonds tend to set the temperature for other interest rates, including mortgages and auto loans. They can affect everything from student loans to the housing market.

Here’s a guide to understanding what is happening with Treasury yields right now, and why it matters.

What is a bond?

First the basics.

A bond is a form of debt, which means that when it is issued, someone is borrowing money and someone else is lending it. In the U.S. government bond market, the borrower is the federal government and the bonds are called Treasuries. Other governments do this, too: In Britain, they’re called gilts, and in Japan, they’re known as J.G.B.s, which stands for Japanese government bonds.

The lender is the bond investor, who expects to be paid interest on the investment. That’s a key difference between a bond and other ***ets that people buy or trade, like stocks: The bond’s yield is the total annual return someone can expect to earn from it. (A bond’s yield rises as its price falls, and vice versa.)

Similar to the rate a homeowner pays on a mortgage, a bond yield reflects a variety of factors: when the debt will be repaid, the risk that it won’t be, the investor’s view on whether earnings on the loan will be more worthwhile than other investments — like stocks and cryptocurrencies.

When an investor owns a Treasury bond until it matures, the return the investor will receive is fixed, but because government bonds are publicly traded, their value can rise or fall just like a stock price, and that means yields move higher or lower, too. Higher yields mean investors are demanding a higher return to make the investment worth it to them.

Why are bond yields rising?

Even within the world of Treasuries, there is a lot of variety. The United States issues debt with a range of “maturities” — a term that refers to when it has to be paid back — from four-week Treasury bills to the 30-year Treasury bond.

Often, it’s the 10-year Treasury note that gets a lot of attention. It has been climbing since late February, when the yield sat at 3.96 percent. Although the rise began reversing in April and then again in May, the yield began rocketing back up by the end of June. It’s currently 4.66 percent.

The rise has been less steep than previous runs, like when President Trump announced sweeping tariffs in April last year. But investors are aware of a ***tail of forces unlikely to rein in climbing yields.

The flip-flopping on a peace deal in Iran continues to rock oil markets, which in turn adds worries over inflation numbers and affordability. Pair that with rampant spending by tech companies on A.I., which has left some ***ysts guessing that the hype has drawn investors away from bonds and others saying the enthusiasm has pumped up growth and inflation expectations.

The Treasury buyer “is now much more price sensitive, meaning investors are demanding a higher yield to absorb both government and corporate issuance,” Jason Goldberg, a Barclays ***yst, wrote in a note.

Some ***ysts said that a recent pullback in the equity market is a sign stock investors are growing more worried about bond yields, too.

Typically, bond prices and stocks move inversely. When stocks fall, investors move to a safer investment, like government bonds, to protect from losses. That negative correlation persisted for the first two decades of the 21st century, but has recently flipped. The correlation, now positive, is at its highest level since the 1990s, Bank of America ***ysts said in a research note on Wednesday.

That flipped correlation means bonds don’t hedge losses the same way they used to, because when stocks fall, so do bond prices.

“Investors are no longer willing to pay the same premium for an ***et cl*** that offers lower hedging utility,” the Bank of America ***ysts wrote.

How do rising yields affect the economy?

One reason the 10-year yield gets so much attention is that it is the starting point from which lenders determine mortgage rates, which means that as it rises, taking out a loan to buy a home becomes more expensive.

As of Wednesday, the average interest rate on a 30-year mortgage was 6.67 percent, up from roughly 6 percent earlier in the year, according to data from Freddie Mac.

How do rising yields predict what might happen next in the economy?

Because Treasuries are issued in varying maturities, each set offers predictions for what will happen in the economy at different time periods.

Typically, the longer the horizon for an investment, the more bond investors expect to be paid in interest. (We have more certainty about how things will go over the next three months than we do about the next decade.)

So the yield on a 10-year Treasury note is usually higher than the yield on one that matures in just a few months or a couple of years. When that relationship reverses during periods of increased economic anxiety, as it did in 2022, it is used as a recession indicator, because the risk in the near term eclipses the long-term risk.

Although yields have room to rise “modestly higher,” the uptick isn’t yet a cause for alarms about buyer strikes or a dysfunctional market, according to a Wednesday note by LPL Financial’s chief fixed income strategist, Lawrence Gillum.

The demand for bonds at last week’s three-, 10- and 30-year auctions was decent, Mr. Gillum said.

“The market is absorbing the paper,” he said. “That is the mechanism we would expect in a normalization: Higher yields recruit buyers. In a crisis, higher yields chase them away.”