For Those Unsettled by Rising US Bond Yields, the Message is Clear: Get Used to It
The world’s biggest bond market and global benchmark is leading a reset higher in borrowing costs, with the prospect of a prolonged period of elevated rates carrying consequences for economies and assets everywhere. Just days into 2025, yields on US government debt are surging as the risks to supposedly super-safe assets mount. The economy continues to power ahead, and the Federal Reserve is rethinking the timing of further interest-rate cuts, Donald Trump is returning to the White House with policies prioritizing growth over debt and price fears as borrowing has soared.
The rate on 10-year notes has soared more than a percentage point in four months and is now within sight of the 5% barrier last breached in 2023 and otherwise not seen since before the global financial crisis nearly two decades ago. Yields edged higher on Monday as traders’ expectations for Fed easing dwindled further and oil prices rose.
Some see the shift upward in yields as part of a natural realignment after years of a near-zero rate environment following the emergency measures taken after the financial crisis and then Covid. However, others see new and worrisome dynamics that present major challenges.
The tensions in the $28 trillion US bond market threaten to impose costs elsewhere, with households and businesses facing higher borrowing costs and US mortgage rates already back at around 7%. Investors are becoming increasingly wary of debt from the UK to Japan, with some pointing out that rising 10-year note yields have foreshadowed market and economic spasms such as the 2008 crisis and the previous decade’s bursting of the dot-com bubble.
Yields are rising even after the Fed joined other major central banks in embarking on a course of rate cuts, a jarring disconnect that has few precedents in recent history. The economy has stayed solid, as seen by the recent jump in jobs growth, and the resilience has sown doubts over just how far and how fast inflation can slow. The Fed’s favored inflation gauge rose 2.4% in the year through November, way below its pandemic-era peak of 7.2% but still stubbornly above the 2% comfort level of central bankers.
The term “bond vigilantes” – investors who seek to exert power over government budget policies by selling their bonds or threatening to do so – is cropping up again in commentary and conversations on Wall Street. Tellingly, the term “bond vigilantes” – investors who seek to exert power over government budget policies by selling their bonds or threatening to do so – is cropping up again in commentary and conversations on Wall Street.
The fiscal footprint is already huge, and Trump’s preference for tariffs, tax cuts, and deregulation sets the stage for even bigger deficits and the potential for accelerating inflation. As politicians “apparently have zero appetite for fiscal tightening, the bond vigilantes are slowly waking,” said Albert Edwards, global strategist at Société Générale SA. “The argument that the US government can borrow in extremis because the dollar is the world’s reserve currency surely won’t hold good forever.”
As debt burdens, the vast stimulus in the wake of the pandemic sent it skyrocketing, part of a global trend. Led by the US, the outstanding government debt among the Organization for Economic Co-operation and Development, a group of the most advanced economies, increased by 35% to $54 trillion in 2023 from 2019. The debt-to-GDP ratio of the OECD nations jumped to 83% from a pre-pandemic level of 73%. It’s not stopping there: Bloomberg Economics projects the US debt-to-GDP ratio will reach 132% by 2034 – what many market watchers see as an unsustainable level.