Bond yields have risen around the world, under threat of a rise mortgage rates and credit card payments for hundreds of millions of people. The US is no exception.
The yield on a 10-year Treasury bond, or the amount paid on a bond each year, is about 4.8%, a jump of about half a percentage point in the last month. That figure marks the highest yield on 10-year Treasury bonds in 14 months.
Yields have rallied in recent days after a stronger-than-expected rally jobs report last week gave the Federal Reserve reason to delay interest rate cuts planned for this year.
The news came after a long month inflation It has already dampened expectations of a rate cut as early as 2025.
Rising bond yields could hit borrowers, but higher annual payments on low-risk Treasuries could offset some of that pain, analysts said. Higher yields, they added, could make it harder for the stock market to hold on to previous years’ gains, but the exact effect remains uncertain.
“A rise in bond rates will certainly affect everyone,” Adam Lamp, CEO of Mint Wealth Management, told ABC News.
Here’s what rising bond yields mean for your finances, according to experts:
“It favors savers and penalizes borrowers”
The downside of rising bond yields is clear, experts say: borrowing costs rise.
Long-term Treasury yields help establish Interest payments on mortgages, credit cards, auto loans and any other type of loan, Dominic Pappalardo, chief multi-asset strategist at Morningstar Investment Management, told ABC News.
That financial pain is the housing market, where the average interest rate on a 30-year fixed mortgage has risen to 6.93%, Freddie Mac the data shows. In September, this average rate was over 6%.
“Whoever needs to borrow money will have to pay higher interest rates, which will increase costs,” said Pappalardo.
The effect of bond yields on consumers is not entirely negative, however.
This trend means better returns for investors who put their money in financial instruments, such as money market funds or high-interest savings accounts, which are safer investments than the stock market.
The average return on a money market fund — a pool of investments in low-risk government and corporate debt — is 4.27%, according to the report. The vanguard. That rate is well above the 2.7% year-over-year inflation rate, meaning a money market fund offers the potential for returns even after accounting for inflation, experts say.
“For those who want to see their money grow faster than the rate of inflation, you can now do so with virtually no risk,” Jim Bianco, a market analyst at Bianco Research, told ABC News.
In other words, rising bond yields portend good days for those with cash to spare and bad days for those in need of a loan.
“High interest rates favor savers and penalize borrowers,” Pappalardo said.
Federal Reserve Board Chairman Jerome Powell makes remarks to the media during a news conference at the Federal Reserve in Washington, DC on December 18, 2024.
Shawn Thew/EPA via Shutterstock
Stock market risk
Rising bond yields could also be a warning sign for the stock market, experts say.
Inflation has slowed dramatically from a peak of more than 9% in June 2022, but price increases remain above the target rate of 2%. The inflation rate has increased in recent months.
Traders are predicting higher interest rates in the longer term, suggesting expectations for a longer run of inflation than expected a few months ago.
If this concern were to occur, the central bank would have to maintain borrowing costs tallwhich can put downward pressure on economic activity and weaken corporate profits.
“Equities don’t look attractive in a higher interest rate environment,” said Lamp, of Mint Wealth.
The stock market soared to record highs in 2024, extending the banner gains of the previous year. S&The P 500 — the index that links many people’s 401(k)s — rose 25% last year.
Bianco said the market could cool in 2025. “You will get moderate types of translation,” he added.
However, the stock’s performance could beat expectations, as it has done in previous years, when many analysts expected an economic downturn, some experts said.
Inflation may come under control sooner than expected, or initiatives introduced by President-elect Donald Trump may accelerate economic growth, even in the face of high interest rates.
However, the prospect of massive growth comes with its own risk, as a booming economy would lead to an explosion in consumer demand and further price increases, Bianco said.
The thorny outlook for the stock market could increase investors’ appetite for bonds, he added.
“Bond funds will return you most of what the stock market will return, but with less risk,” Bianco said.
