Americans who have been grappling with the higher cost of living over the last few years now face another issue: trouble in the US bond market that could mean elevated costs are here to stay.
US government bonds – known as treasuries – are supposed to be the most stable type of investment vehicle. But investor concerns over issues including rising inflation, the continuing war with Iran, and the US’s record national debt have shaken the market and slowed demand for US treasury bonds.
Loans for homes, cars and credit cards, along with money businesses borrow to keep things running, could get more expensive if the sell-off in the bond market continues.
Here’s what we know about the problems in the bond market and what it could mean for US consumers.
How the US bond market works
A US treasury bond is essentially the US government packaging up its debt and selling it to investors with a promise to pay interest. Investors can buy bonds that mature at different rates – a two-year note will mean an investor gets their money back quicker than a 30-year bond, but typically with lower interest.
When it comes to measuring the bond market, investors pay attention to the yield rate for each type of bond. The yield is the rate of return that investors who purchase that type of bond can expect to receive once the bond matures, and it fluctuates based on the price of the bond itself.
A higher yield rate means more investors are trying to sell off their bonds and are willing to offer more to get it off their hands.
What’s happening in the bond market?
While small fluctuations in the bond market are normal, the yield on US treasurys has continued to rise over the summer, with the 10-year treasury note hitting its highest yield since 2023 on Tuesday.
The increase started in the spring, when the US first declared war in Iran, and has kept rising. At the end of February, the yield rate for the 10-year treasury was 3.95%. On Wednesday, the rate hit 4.8%.
The yield for the 30-year treasury took a huge dip earlier in the summer, when the US and Iran were in the middle of a temporary ceasefire. At the time, oil prices were dipping down to their lowest levels since the start of the war, and prices have been up ever since.
Activity in the bond market provides an insight into how investors are feeling about the US economy, even more so than the stock market, which can get outsized boosts from industries that are doing particularly well, like AI and tech, even when other sectors of the economy are faring less well.
Higher yields in the bond market point to concern around rising inflation, which has ticked up significantly since the start of the Iran war. Investors are bracing for higher interest rates from the US Federal Reserve, which is expected to raise rates at least once before the end of the year. This would also make borrowing more expensive, even if the bond market calms.
Higher loans for consumers
Mortgages are closely tied to the US treasury market – when yields go up, mortgage rates are expected to follow. Mortgage rates are already double what they were during the pandemic. While the 30-year fixed-rate mortgage dipped down below 6% in February, reaching its lowest level since 2022, rates have since gone back. At the end of August, the mortgage rate sat at 6.66%, and is expected to go up more after the bond market sell-off.
House building has already been hit by higher rates and a further blow will ripple through the economy from construction jobs to the sale of white goods.
Other loans will also be affected, including car loans and the interest rates consumers pay for their credit cards.
Alex Jacquez, senior vice-president of policy, advocacy and research at the progressive thinktank Groundwork Collaborative and a former economic adviser to the Biden administration, said that higher borrowing costs will be especially painful for Americans whose savings have been depleted after years of high inflation.
“We’ve seen credit card balances start to creep back up, defaults start to creep back up,” Jacquez said. “More and more people are turning to credit instruments to pay down all kinds of basic things like healthcare, groceries and gas.”
Failed intervention
Scott Bessent, the US treasury secretary, announced that the treasury department would triple its buyback of US treasuries, increasing the operation from $2bn to $6bn.
The move is just the latest intervention meant to stabilize the bond market. Earlier in the month, Trump announced the US bought Japanese yen to strengthen the currency, which was seen as a move to prop up the Japanese government, a major owner of US bonds.
While Bessent’s announcement briefly calmed the treasury market, it did little to quell investor concerns over inflation and yields soon started rising again. The Billionaire investor Stanley Druckenmiller, Bessent’s former mentor, criticized the move, saying “governments defending prices against fundamentals always lose”.
The backdrop of the bond market crisis is the US hitting a major borrowing milestone. The gross national debt topped $40tn for the first time in history last month, and Trump has shown little interest in his pre-election pledge to balance the US’s budget.
Jacquez, of the Groundwork Collaborative, said that there was little that the Trump administration can do if it continues to pursue inflationary policies, like continued conflict in the Middle East and new tariffs on close trading allies.
“First and foremost, they should stop getting in their own way,” Jacquez said. “It’s no wonder that people are expecting more inflation in the months to come.”