Sam Goldfarb
The Wall Street Journal
January 13th, 2025
Government-bond yields have surged across the developed world in recent weeks, jarring stocks and pressuring indebted countries.
The worldwide bond rout threatens to complicate the efforts of central banks that have been cutting short-term interest rates. Rate cuts aim to lower borrowing costs for consumers and businesses. But the rise in yields is instead making it costlier to borrow, “tightening financial conditions” in Wall Street parlance. The average 30-year U.S. mortgage rate rose to 6.9% last week.
Here’s what is behind the surge, and what it means:
Following the U.S.
Most analysts believe the U.S. has been driving the recent bond-market selloff.
Yields on U.S. Treasurys, which rise when bond prices fall, got their first big boost in October with the release of strong monthly jobs data that wiped away fears of a looming recession. Then Donald Trump won the U.S. presidential election promising policies that many investors believe are inflationary, and Federal Reserve officials shifted their forecasts to fewer rate cuts in 2025.
Yields on ultrasafe government debt are largely determined by investors’ expectations for what short-term interest rates will average over the life of a bond. Yields on Treasurys are higher than those on German bonds because rates are lower in Europe, where the economy is weaker.
Changes in yields, however, tend to be correlated. When Treasury yields rise, investors seeking a better return can sell their German bonds to buy Treasurys. That causes German bond yields to also rise.
A growth outlier
The good news for investors is that rising U.S. Treasury yields generally reflect a robust economy, which should support corporate profits.
Though inflation remains above the Fed’s 2% target, it has fallen sharply from its peak in 2022. Growth, meanwhile, has been far stronger in the U.S. than it has in other large, rich countries.
Fueled by uncertainty
The bad news: Yields might also be rising for some less-good reasons, including growing uncertainty about the longer-term outlook for interest rates and inflation.
Concerns about the federal budget deficit could also be a factor. Larger deficits require the Treasury Department to issue more debt, and the additional supply can hurt the value of existing bonds.
One sign of such worries is a surge in estimates of the Treasury “term premium”—the component of a Treasury yield that incorporates everything other than investors’ baseline rate expectations. According to some estimates, the 10-year term premium has recently reached in its highest level in years.
The deficit question
Deficits in the U.S. and in some other rich countries are unusually large for a non-recessionary period. Rising yields also make deficits larger by forcing governments to spend more on interest expenses.
The U.S. has an advantage over other countries because Treasurys are the bedrock of the world financial system and the easiest asset for investors to buy and sell.
That has historically helped the U.S. to run big deficits without creating problems in markets. But rising yields have already become a factor in budget deliberations in the U.K., where a bond-market crash helped topple then-Prime Minister Liz Truss in the fall of 2022.
A drag on stocks
Rising yields can pressure stocks by lifting borrowing costs across the economy and increasing the risk-free return that investors can get by holding Treasurys to maturity. As that safe return rises, riskier assets like stocks can appear more expensive.
Despite encouraging economic data and Wall Street’s initially positive reaction to Trump’s election win, stocks have struggled over the past month.
The road ahead
Stocks could be especially vulnerable to rising yields now because they were already looking expensive by historical standards.
One measure of stock valuations is the “excess CAPE yield” developed by economist Robert Shiller. This shows the S&P 500’s inflation-adjusted earnings-to-price ratio minus inflation-adjusted bond yields. At the end of December, that excess yield was just 1.24%—a level that has historically translated to poor returns for stocks over the next 10 years.