Bond market sell-off threatens to drive up loan costs

A bond sell-off driven by investor fears over inflation and rising government debt has rattled markets and threatened to raise borrowing costs for everyday Americans looking to purchase a home or car.

The yield on the 30-year Treasury reached 5.3% earlier this week, its highest level since 2007, while the 10-year Treasury yield, which influences mortgage rates, rose to 4.7%, up from 4.2% at the start of the year.

Bond yields and prices move in opposite directions, with higher yields reflecting investors' desire for higher returns on their investments, often amid fears of economic or geopolitical instability.

"Bond markets are sending an equally loud signal," Nigel Green, CEO of financial consultancy deVere Group, said in an email Wednesday.

"30-year yields at their highest since before the financial crisis are not a footnote to the equity story. They're a warning about the true cost of government borrowing," he added.

Long-term bond yields subsided after the Treasury Department announced a buyback effort on Wednesday, but remain elevated.

Green said the sell-off could reflect a shift in market sentiment as investors come to terms with several forces, including elevated borrowing costs and mounting government debt, which, according to Treasury Department data released Wednesday, has now surpassed $40 trillion .

Instability in the Middle East may have also contributed to the bond rout. Bond yields moved higher on Monday after a 60-day ceasefire between the U.S. and Iran came to an end , with no clear resolution in sight.

The conflict in the Middle East , now nearing its six-month mark, has sent oil prices higher, elevating inflation concerns. Inflation eased in June and July after hitting a three-year high , but it remains above the Federal Reserve's 2% target.

The sell-off also comes as tech companies such as Amazon and Meta issue more debt in the bond market to finance the AI buildout. Tech giants have traditionally relied on operating cash flow to fund their investments, but that's changing, Lucas Baynes, Vanguard senior investment strategist, said in an email Thursday.

According to Baynes, the five major hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — issued $93 billion in debt last year, compared with an average of about $35 billion per year between 2020 and 2024.

U.S. yields dropped on Wednesday after the Treasury Department announced it would double the size of its bond buybacks from $2 billion to "at least $4 billion," a move aimed at stabilizing the bond market by injecting it with more liquidity.

The Treasury Department said it would focus its efforts on longer-term bonds, including those with maturities of 10 to 20 years and 20 to 30 years.

"While long-term government bond yields have dropped back a little today, their recent surge suggests investors are losing patience with fiscal profligacy," Jonas Goltermann, a chief market economist at Capital Economics, said in a research note Wednesday.