What Surging Treasury Yields Mean for Your Finances

Treasury yields have surged this week, extending a steady and surprising increase that has raised concerns for investors and consumers alike.

The yield on the 10-year Treasury, which has a direct impact on a wide range of borrowing costs, hit its highest level since April on Wednesday, moving as high as 4.73% before settling at 4.69%. The yield held steady on Thursday ahead of the highly anticipated release Friday of the December jobs report.

In the last four months, the yield has increased a full percentage point, even as the Federal Reserve has cut its benchmark interest by the same amount.

Treasury yields have been driven higher by signs of strong economic growth, concerns about sticky inflation, and uncertainty about the consequences of President-elect Donald Trump’s policy proposals. This week, in particular, labor market data has underscored the resilience of the economy, raising concerns that the Fed may not cut rates again.

The move higher in yields has put pressure on stocks and other financial markets that are sensitive to the possibility of interest rates staying higher for longer.

What Could Higher Yields Mean for Mortgages?

The last time Treasury yields climbed to their current levels, in April 2024, consumer interest rates followed suit. The average 30-year mortgage rate rose from 6.8% to 7.2% between early April and early May. Amid a surge in October 2023, when the 10-year yield briefly topped 5%, the average mortgage rate hit a 23-year high of more than 7.6%.

Surging mortgage rates in those instances reduced housing affordability and weighed on the market. Home sales declined nearly 2% in April as both rates and house prices increased. That same month, contract signings fell to their lowest level since April 2020. 

As of early January, the average 30-year mortgage rate was still below 7%, but it was well off its 2-year low of about 6% from late September.

What Happened To Stocks Last Time Yields Rose?

When Treasury yields last reached their current levels, they also hit stock portfolios. The S&P 500 pulled back more than 5% in the first three weeks of April 2024, when the 10-year yield advanced more than 40 basis points. And in October 2023, the benchmark index fell into a technical correction as Treasury yields peaked after a monthslong ascent. 

Amid the recent surge in yields, stocks haven’t pulled back in the same way. The S&P 500 on Wednesday closed about 2.8% below the all-time high it reached in early December. Still, the index is up more than 5% since yields began climbing in mid-September. 

Could Rising Rates Trigger Another Correction?

The recent rise in bond yields has sparked some debate about whether stocks are in store for another correction. While a correction is always possible, current conditions don’t suggest a major pullback is imminent, according to Deutsche Bank analyst Henry Allen.

First of all, most bear markets coincide with recessions. But the U.S. economy is expected to continue growing at a considerable clip this year. And while stocks can see big losses outside of recessions, history suggests those major drawdowns often coincide with two occurrences: slowing growth and Fed rate hikes. 

At the moment, neither appears likely. “However, if signs of a slowdown emerge or rate hikes move back on the table, the historic precedents show that equities are capable of a notable decline, even without a recession,” says Allen.