A worldwide decline in government bonds has driven up the borrowing costs for some nations to levels not seen in over a decade. This development carries repercussions not only for governments in debt but also for the financial well-being of countless mortgage holders, stock investors, and businesses.
The bond sell-off has been driven by investor expectations that major central banks will maintain higher interest rates for an extended period to combat inflation. When interest rates rise, bond yields increase, prompting investors to sell their existing bonds and opt for newly issued ones with higher yields. This selling pressure leads to falling bond prices.
Recent yield increases have been notable, with the yield on 30-year US Treasuries reaching 5%, a level last seen in 2007. In the UK, 30-year bond yields also hit 5%, the highest in over two decades. German and Italian bond yields have surged as well.
For many, the impact is felt through mortgage rates, as these often correlate with local government bond yields. Higher yields translate to elevated borrowing costs for homebuyers. In the UK, a budget announcement in September 2022 led to a sell-off in government bonds, causing mortgage rates to rise significantly.
US mortgage rates tend to follow the yield on 10-year Treasuries, which has seen an increase since late September. Freddie Mac reported that the average interest on a 30-year fixed-rate mortgage hit 7.31%, the highest level since 2000.
These rising mortgage rates create challenges for both potential buyers and sellers in the housing market, potentially influencing buyer-seller dynamics and impacting the overall real estate sector.
As central banks continue to grapple with inflation, the repercussions of the bond market turmoil continue to reverberate through various sectors of the global economy.