Higher mortgage and credit card rates are here. What the bond market means for you

The United States bond market is the latest challenge throwing hurdles in the way of post-pandemic economic recovery.

Investors are worried, but the impacts of the latest mayhem are already taking hold beyond Wall Street.

Here’s what you need to know about rising bond yields and the turbulent bond market.

What is the bond market?

In the simplest terms, a bond is a loan.

When big organizations, including governments and corporations, need money, they issue bonds. This means they borrow money from investors on the promise that they will pay back the loan by a certain date and make interest payments in the meantime.

The U.S. government issues bonds to consumers to raise money to pay for its operations. There are three types of securities offered, each with a varying maturity length — how long it takes the government to pay back the loan.

Of the three kinds of loans, Treasury notes are the middle ground: They range from a year to 10 years.

The 10-year Treasury note’s yield — the interest rate earned by the lender or investor — is an important global benchmark. This rate determines interest rates for a lot of other debts, including mortgages and credit cards.

In addition to serving as a benchmark, the 10-year T-note is considered one of the safest investments, along with other Treasuries, because “they are backed by the full faith and credit of the U.S. government,” according to the Securities and Exchange Commission.

What does a high yield mean for consumers?

The recent increase in bond yields poses serious threats to consumers — some of which have already manifested as interest rates on debts have skyrocketed.

Because the 10-year yield determines the rate consumers pay on other debts, mortgage rates and credit card interest rates have seen huge upticks.

The yield on the 10-year Treasury note yield hit a high on Monday, Oct. 23, briefly breaking the 5% threshold. That’s the highest it’s been since June 2007, NPR reported.

Mortgage rates, for example, have been climbing toward 8% in recent weeks, according to data from Freddie Mac. As of Oct. 19, the 30-year-fixed-rate mortgage hit an average of 7.63%, up from the week prior when it was 7.57% and last year when it averaged 6.94%.

Credit card rates, too, have felt the impact of rising yields, surpassing 20% in August 2023, according to data from the St. Louis Fed. That’s the highest recorded rate since the Fed began collecting data in 1994.

Part of the Fed’s fight against inflation

The Federal Reserve’s continued fight for economic recovery, especially bringing inflation back to its target 2%, has contributed to the uncertainty in the bond market.

Treasury yields are catching up to the Fed’s 11 rate hikes since March 2022. As the Fed’s benchmark interest rate rises, so do yields, which drives bond prices down.

In addition to the Fed’s rate hikes, the bond market is also facing a steep sell-off.

At the start of the COVID-19 pandemic in March 2020, the Fed bought more than a billion Treasury securities as a means to keep the economy afloat. Now, it is selling off those securities. By flooding the market with Treasuries, the Fed is driving up supply of bonds, which is lowering the cost of bonds and thus, hiking yields.

Why does the Fed want higher yields? It’s still trying to cool the economy by making it more expensive for consumers to borrow money.

Ongoing risk of recession

But the Fed still faces another risk: a recession.

Ideally, attempts at slowing the economy will result in a soft landing, or what Brookings experts have described as “the equivalent of ‘Goldilocks’ porridge’ for central bankers: following a tightening, the economy is just right — neither too hot (inflationary) nor too cold (in a recession).”

But as the bond market faces turbulence, the financial system faces greater risks.

Because bond yields are high, investors have greater opportunities for making money from investments into Treasuries as opposed to putting their money in a savings account or investing in the stock market. As investors turn to the bond market, the prices of stocks will fall and banks’ profitability will decrease.

Both of these phenomena are bad signs for the economy.

The future of the bond market

The Federal Open Market Committee meets for the seventh time this year on Oct. 31 and Nov. 1.

Most experts aren’t expecting another rate hike, Forbes reported. Instead, they predict that rates will stay higher for longer, especially as the economy maintains its resiliency and long-term interests rates have risen.

Fed Chair Jerome Powell said in an Oct. 19 speech that the FOMC will continue “proceeding carefully” but remains committed to bringing the rate of inflation back to 2%.

“A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” Powell said in his speech. “Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.”

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