From mortgages to stocks, how higher government bond yields hit wider markets

Published Sat, Sep 6 20251:35 AM EDT

Key Points

Long-dated government bond yields hit notable highs around the world earlier this week before easing off, reflecting investor unease about governments' fiscal plans — but no market panic.
Yields on the short- and long-end nonetheless remain elevated, with a range of knock-on effects on the economy.
That includes putting pressure on mortgage prices and constraining the private sector, analysts say.

Bond markets were back in focus this week as rising yields — which reflect higher borrowing costs for governments — raised concerns over debt sustainability around the world. Described by analysts at Deutsche Bank as a "slow-moving vicious circle," higher government bond yields increase the cost for nations to service their debts, at a time when many major economies — from the U.S. to the U.K. , France and Japan — are struggling to reduce their fiscal deficits. Questions about their ability to do this puts further upward pressure on long-term bond yields, as investors demand a higher risk premium, which worsens debt dynamics further. Yields broadly eased across Thursday and Friday, pulling back from some of the eye-catching milestones reached earlier in the week, which included the Japanese 30-year at a record high , the U.K.'s 30-year at a 27-year high , and the U.S. 30-year peeking above 5% for the first time since July . Yields move inversely to bond prices. "The volatility that we've seen over the last two weeks is something that we've probably gotten a bit used to in the bond market... cooler heads will prevail, and markets will function as they should," Jonathan Mondillo, global head of fixed income at Aberdeen, told CNBC's "Squawk Box Europe" on Thursday. But government borrowing costs at both the short- and long-end remain far higher than they were a few years ago in the wake of interest rate hikes and high inflation. This has a range of knock-on impacts on the wider economy that traders will continue to monitor as fiscal challenges remain acute. One element of the economy that is expected to be impacted, is mortgage rates. While mortgages are influenced by a range of lender- and borrower-specific factors, key drivers are central bank-set interest rates and government bond yields , both of which generally make things more expensive for homeowners when they go up. That makes upward moves in the 30-year Treasury particularly concerning, W1M Fund Manager James Carter said Thursday, given the popularity of 30-year mortgages in the U.S. Pressure on the 30-year yield been exacerbated by U.S. President Donald Trump's attacks on the Federal Reserve , which seems "counterintuitive" at a time when he is calling for lower interest rates , Carter told CNBC's "Europe Early Edition." Trump's influence could potentially help get the short rate lower, Carter said. Fed officials are already expected to resume rate cuts this month after weaker-than-expected jobs data. "But the long end of the curve is just going to panic that this is not what the White House typically does, and this is not helpful for long-term inflation expectations, and those yields are likely if anything to keep moving higher, and that's not going to help mortgage holders," Carter continued. Economic drag Traditionally, the U.S. bond market has acted as a safe haven for investors at times of volatility or risk-off sentiment in stock markets. However, that relationship has been eroded this year as White House policymaking, particularly on tariffs, has been the cause of market jitters. There's also historically a broader inverse relationship between bonds and equity markets. "As yields climb, reflecting higher yields from typically safer assets like bonds and cash and increasing the cost of capital, stock valuations tend to come under pressure," Kate Marshall, senior investment analyst at Hargreaves Lansdown, told CNBC. "That relationship has been visible at times this year. Globally, higher yields have unsettled equity markets, and we have recently seen falls in U.K. and U.S. equities." "But the correlation isn't perfect. There have been periods where equities and bond yields have risen together, so it's a reminder that bond market signals can be interpreted differently depending on what's driving them," she added. One area that has seen a positive influence from government bond yields in recent years has been the corporate bond market, which allows companies to fund expansion, noted Viktor Hjort, global head of credit and equity derivatives strategy at BNP Paribas. "High yields does a number of positive things for the corporate bond market. It attracts demand, obviously, because of the yielding carry. It reduces supply, because it's expensive for corporates to borrow heavily, and it incentivizes corporates to be pretty disciplined about their balance sheets, and therefore deleverage," he told CNBC's "Squawk Box Europe." "The government bond side is the relatively riskier part of the market today," he added. However, Kallum Pickering, chief economist at Peel Hunt, emphasized the drag on corporate activity itself from higher bond yields. "This is true around the advanced world. Just because we don't have a crisis in the bond market, doesn't mean these interest rates are not having economic consequences. They constrain policy choices, they crowd out private investment, they leave us wondering every six months whether we're going to suffer a bout of financial instability. This is really bad for the private sector," Pickering said on CNBC's "Squawk Box Europe" on Wednesday. The economic drag from high yields has become so severe that a period of government austerity could actually have a stimulative effect, he continued. "You would give markets confidence, you would bring down these bond yields, and the private sector would just breath a sigh of relief and start dispensing some of its balance sheet strength," he said.