When the US Bond Market Has the Power to Intimidate

Effects include rising mortgages, slowing economy and sputtering stock markets

- Jeff Sommer

Financial crises come and go—and then come right back again. But they never seem to entirely go away. That has been the pattern of this Trump administration.

Staying calm and taking a long view is what you are supposed to do in investing.

But with the on-again, off-again tariffs of US President Donald Trump disrupting world markets, big budget deficits looming and a fickle stock market, there has been plenty to worry about.

Add to all that soaring global bond yields and you have got a recipe for sleepless nights.

Rising bond yields demand to be noticed because they have a range of negative consequences: Mortgage rates rise, economic activity can slow, stock markets tend to sputter and the cost of doing business steepens throughout the economy.

When yields get high enough, a government that finances much of its activities through borrowing, as the United States does, may eventually find that it cannot function without imposing painful budget cuts or raising taxes, or both—and outcomes like these will thwart any politician's dreams.

Moreover, because Treasuries and the dollar are the fulcrums for the global financial system, tremors in the US Treasury market reverberate around the world.

In fact, yields have been high in other large, critically important financial centers as well—in Germany, Britain and France, for example.

Yields and the cost of doing business have risen in many other countries as well, including Mexico, Chile, Indonesia, the Philippines, Nigeria and South Africa.

HOW SERIOUS?

What is most important about the recent yield surge is the trend, not the level that bond yields have already reached.

One reason that the rise in US yields alarmed many people is trivial. It is that 30-year Treasuries breached a seemingly meaningful level: 5 per cent, a nice round number.

What is the difference between 4.99 per cent and 5 per cent though? Practically nothing.