Government bond yields are pressuring everything, from home loans to equities

Government bond yields are tearing through everything right now. Homeowners, stock traders, governments; no one’s getting out of this untouched.

What started as a slow change in borrowing costs has now turned into what analysts at Deutsche Bank are calling a “slow-moving vicious circle.”

They’re not wrong.

Governments, from the U.S. to the U.K., France, and Japan, are all struggling with rising interest payments on massive deficits. When investors start doubting whether these countries can handle their debt, they demand more compensation to lend. That pushes bond yields even higher, which makes those debts worse.

Rinse and repeat.

Yields spike and home loans feel the hit

By midweek, the 30-year U.S. Treasury jumped past 5%, the highest since July. In Japan, their 30-year bond hit a new record. The U.K.’s 30-year spiked to its highest level in 27 years. Even though yields eased slightly on Thursday and Friday, they’re still way above pre-2020 levels.

The bigger issue? These high borrowing costs are sticking around.

“Cooler heads will prevail, and markets will function as they should,” said Jonathan Mondillo, global head of fixed income at Aberdeen. But let’s not pretend this volatility is normal. Yields move in the opposite direction of bond prices, and this kind of price action means markets are nervous. Really nervous.

Mortgage rates are feeling the heat. The 30-year Treasury yield directly impacts the 30-year mortgage, still the most popular home loan in the U.S. When that yield spikes, monthly payments go up fast.

“That’s concerning,” said W1M Fund Manager James Carter. He pointed to rising long-term yields and said, flat out, “this is not going to help mortgage holders.”

Yes, Trump’s pressure might lead to short-term rate cuts, and weaker job data already has Fed officials preparing for that. Carter called that “counterintuitive” and warned it could backfire.

But Carter said the long end of the bond curve is reacting badly: “The long end of the curve is just going to panic… this is not what the White House typically does… those yields are likely if anything to keep moving higher.”

Stocks slip, corporates tighten, and investors get nervous

As we mentioned, higher government bond yields are punching stocks in the gut too. Normally, when markets get shaky, investors run to bonds. But that safe-haven status is cracking. This year, White House decisions on tariffs and erratic policymaking have made bonds part of the problem, not the solution.

Kate Marshall, senior investment analyst at Hargreaves Lansdown, said rising yields pressure stock valuations. “As yields climb, reflecting higher yields from typically safer assets like bonds and cash and increasing the cost of capital, stock valuations tend to come under pressure,” she explained. And yeah, we’ve seen it: both U.K. and U.S. equities dropped recently.

But it’s messy. Marshall pointed out that the correlation isn’t always perfect. Sometimes, stocks and bond yields rise together. Depends on what’s driving it. But in today’s environment, with inflation still high and rate policy still unpredictable, this dance between stocks and bonds is just adding more confusion.

There’s one corner of the market that’s found a strange upside: corporate bonds. Viktor Hjort, head of credit and equity derivatives at BNP Paribas, said high yields help the corporate bond space in some ways.

“It attracts demand… it reduces supply… it incentivizes corporates to be pretty disciplined about their balance sheets,” he said. Basically, borrowing gets more expensive, so companies think twice before adding more debt.

Kallum Pickering, chief economist at Peel Hunt, said, “Just because we don’t have a crisis in the bond market doesn’t mean these interest rates are not having economic consequences.” According to him, high yields “constrain policy choices,” “crowd out private investment,” and leave markets wondering “every six months whether we’re going to suffer a bout of financial instability.”

That’s not exactly a great setup for business expansion.

Pickering even floated the idea that a new round of austerity (yes, government spending cuts) might be what it takes to break the cycle. “You would give markets confidence, you would bring down these bond yields, and the private sector would just breathe a sigh of relief,” he said.

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