By now, you’ve probably seen the headlines: for the last few weeks, we’ve been mired in a global bond sell-off. Wait, no, please don’t fall asleep! This is important.
In a recent episode of the NPR show Marketplace, Financial Times writer Robin Wigglesworth suggested that many people see the bond market as “the boring sibling to the stock market.” In other words, when people hear ‘bonds,’ they tend to stop listening. But, over the last couple months, the bond market has been anything but boring. If there’s a time to wake up and monitor the bond market, that time is now.
What even are bonds?
If you’re already familiar, you can skip this bit.
Bonds, like stocks, are a type of financial asset that can be bought and sold on a market. But unlike stocks – which represent partial ownership of a company – bonds represent debt. When you purchase a bond, you are essentially loaning money to a government or company, with a set repayment date and interest rate. Governments and companies use the money you’ve loaned them to invest in their projects.
A bond yield is the annual income you earn from owning a bond, expressed as a percentage of its total price. Bond yields and prices have an inverse relationship – when one goes up, the other goes down. Meanwhile, the coupon rate for a particular bond – the periodic interest rate paid to the investor – remains fixed.
Bonds are traded in the context of the current market. If new bonds are issued with lower interest rates, then older bonds with higher interest rates become more valuable, and their prices go up. This causes their yields to fall because investors are paying more for the same coupon.
So, what’s going on with bonds right now?
Since August, government bond yields have been climbing across the Global North. In the US, yields on the 10-year Treasury and the 30-year Treasury hit 24-year highs this month, at over 5%. The 10-year French government bond also reached a 24-year high this month, nearing 5%. In the UK, the yield on 10-year government bonds recently reached a 19-year high. In Canada, yields have climbed too, albeit somewhat less dramatically.
Why is this happening?
Experts have been trying to diagnose the reason for the surge in bond yields, but there are tons of factors at play. One is that investors demand higher yields when inflation is predicted to rise, in order to offset the potential reduction in purchasing power. Inflation concerns can also drive up interest rates, pushing yields higher. With Trump’s costly war in Iran driving up the price of oil over the past several months, inflation has been a significant concern.
Another factor is a government’s perceived credibility. Investors will generally accept lower yields when an investment feels stable, but they may demand higher yields if there are concerns about a government’s fiscal position. Stanford University economist Hanno Lustig writes that US bond yields are rising because “people don’t have as much faith in the fundamental safety of Treasuries as they used to, and many investors are increasingly concerned about the U.S. fiscal situation.” On the flip side, Desjardins’ Royce Mendes recently speculated that Canada’s increased credibility on the world’s stage is part of why our bond yields have risen less sharply as compared to our peers.
Bond yields are relevant to everyday people because they effectively set the price of borrowing money.
Related to credibility is the issue of mounting government debt – a factor across many countries, but particularly acute in France. As students lead widespread protests against crumbling education infrastructure, the French government expects to spend more on interest payments than on education and defence. The situation doesn’t exactly inspire confidence in France’s fiscal position, and the bond market has responded accordingly, with French bond yields significantly higher than yields in other eurozone states. (Presently, French 10-year bond yields are nearing 5%, whereas German 10-year bond yields are hovering around 3.5%.)
Another reason why government bond yields are rising might be that corporate bonds are flooding the market at an incredible pace, thanks to the AI buildout. On a recent episode of The Economist’s podcast “Money Talks,” RBC BlueBay Chief Investment Officer Mark Dowding explained that, while we typically see US$400 billion to US$500 billion in new corporate bonds each year, that number will more than double to US$1 trillion for 2026. “This is a huge volume of additional debt for the market to absorb,” Dowding said. More corporate bonds on the market create more competition for government bonds, particularly at a time when investors are feeling skeptical of the US government.
Uh… Should I be concerned?
It depends on who you ask – and where you live. For the average Canadian, you’re likely to see the impact most clearly in your interest rates. Bond yields are relevant to everyday people because they effectively set the price of borrowing money. As Lustig puts it, in the American context, “when Treasury yields rise, the rates households pay on mortgages, auto loans, and other forms of consumer borrowing tend to rise right along with them.”
Your fixed-rate mortgage, for example, is tied to the bond market. Canadian Mortgage Trends News reports that “since early September, all of the Big 6 banks have increased at least some fixed rates,” with TD and RBC making some of the biggest jumps. And if you took out a mortgage during the height of the pandemic, when Canadian five-year bond yields were less than 1%, you’re up for renewal in what CD Howe Institute calls “a vastly different environment." The five-year yield now sits at 3.7%.
On a global level, we could see more dramatic effects. The words “debt crisis” have been invoked multiple times to forecast the situation in France; indeed, France’s near-stagnant economic growth, social unrest, and surging far-right political movement are all likely to exacerbate its out-of-control bond yields.
But the situation in the US is somewhat more ambiguous. Economics reporter Matthew Klein writes that “today’s rates are obviously too high only if inflation and growth are both poised to slow sharply from here. That is certainly possible, but it would (probably) only happen if the U.S. fell into a downturn.”
In other words, Klein doesn’t think that rates are too high now; he thinks they were too low until now. As long as yields are increasing at pace with growth, he doesn’t see a reason to be concerned. This analysis extends beyond the US, as well, to countries like Canada. “For many places, such as the U.S., Canada, Japan, Portugal, and Spain, there has been a one-for-one link between the uptick in yields and the change in growth rates,” Klein writes.
Other experts see things differently. David MacNicol, president of MacNicol & Associates Asset Management, penned an op-ed in the Globe and Mail under the headline: “Spiralling chaos from the bond market will shake the world economy.” MacNicol wrote that “higher yields are not fundamentally negative” but that “the volatility and speed of bond-price adjustments” pose a danger to the global economy.
So, I need to pay attention because…?
Right now, we don’t know exactly what the bond market is telling us. It might be sending messages about growth, inflation, government credibility, or all of the above. But its movements have been significant and volatile these last couple months, and the ripple effects are potentially huge – from a possible eurozone debt crisis to your own mortgage rate. Bonds! Who knew?
The bond market is a little harder to wrap your head around than the stock market, and it often gets overlooked as a result. But it’s massively influential – and, right now, it’s worth watching.
