Consumers could be facing higher borrowing costs for longer as bond markets are once again signalling rising economic risk to the finance and investing community amid the Iran war, rising government debt and an escalating trade war.
A bond is essentially a loan that governments and companies use to borrow money from the general public, and in return for providing funding, those that purchase bonds expect to earn interest.
The yield on the 10-year U.S. government bond increased to about 4.9 per cent as of publication — the highest since 2023, an increase of 0.8 percentage points since the start of September. This also comes after the 30-year bond yield spiked over five per cent in July, the highest since 2007.
Meanwhile, Canada’s 10-year government bond yield was at about 3.9 per cent, the highest in nearly two years, with most of the spike happening at the start of the month. This was at the same time that Canada’s retaliatory tariffs on U.S. goods took effect, and raised inflation risks.
Bond yields tend to fluctuate for a variety of reasons, but a sudden sharp rise in bond yields can signal that investors are concerned about inflation, government debt or economic uncertainty and are choosing to sell their bonds because of the increased perceived risk.
Higher yields can also drive up interest rates on mortgages, corporate loans, consumer credit and other products to protect lenders like banks from a higher risk environment. Although the Bank of Canada’s interest rate policy can affect borrowing costs in the short-term, bond market changes have more of an affect on long-term rates.
“You have these higher oil prices because of the Iran war and that’s stoking inflation fears, you’re seeing treasury yields in the U.S. spike, and that’s because investors are demanding a higher return on lending the government their money because they see so much risk there,” says mortgage and personal finance expert Clay Jarvis at NerdWallet Canada.
“That can be tied to the Iran war and the amount of money that is being spent there and the inflationary impact that it’s having on U.S. consumers.”
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Bonds are priced based mostly on supply and demand, but the reasons for those changes can vary.
According to a statement released Wednesday from Kana Norimoto, an allocation of assets researcher at Fidelity Investments, long-term bond investors are trying to guess about what will happen with interest rates, inflation, government debt and spending, and says, “When the future feels unpredictable, investors want a bigger payout to take on the risk of holding onto long-term bonds.”
“People are starting to look a little nervous if they’re holding large amounts of government bonds,” says economics professor Moshe Lander of Concordia University.
“What we’re seeing is that the higher bond yields are not because the [U.S.] government is using its deficit financing in a more productive way. It’s that it’s more expensive to finance the deficit because of the extra risk that’s involved.”
“That’s not the type of thing that attracts people then, that could actually make them run away, and it could actually exacerbate the problem.”
There are several risks economies worldwide are exposed to, with the U.S. at the centre of it all because it is the world’s largest economy. This includes the war with Iran, which has led to spiking prices for oil and other commodities, and has led to higher inflation.
“As the ceasefire in the Middle East dissolved, oil prices jumped back above US$90 per barrel—the highest level since early June—stoking inflation concerns,” said Vikram Rai, senior economist at TD Bank, in a report on Thursday.
Rai added: “Since the relative low in yields before the conflict with Iran, 10-year yields have risen by about 80 basis points in the U.S. and 60 basis points in Canada.”
Rising U.S. debt is another area of concern for investors.
“The U.S. government is borrowing more as some traditional buyers step back,” said Rai.
“Private investors must therefore absorb a growing share of government debt and are demanding higher yields to do so. ”
Although higher bond yields can present an investing opportunity for certain investors, it can also present affordability challenges for consumers, especially with long-term loan products.
Higher bond yields can effect the interest rates on certain mortgages, car loans, lines of credit and student debt.
With mortgages, for example, if government bond yields are rising, that could result in higher fixed-term mortgages offered by commercial banks and other lenders.
“A lot of people have their eyes on fixed mortgage rates in Canada, three years and five years, because those [bond] yields have been driven sky high,” says Jarvis.
“When these bond yields increase, you often see banks and other lenders increasing their three and five-year fixed rates.”
Higher borrowing costs as a result of spiking bond yields could also indirectly lead to higher prices for some goods and services in Canada.
If a business is faced with higher costs, they may make changes to maintain profits. This can be through increasing productivity, reducing costs elsewhere, or potentially passing along those higher costs to consumers.
“There should still be lots of concerns here for businesses and consumers. If the yields are higher, then that means when the government has to refinance its debt, it’s going to have to refinance it at a higher rate,” says Lander.
“This all of a sudden becomes more expensive than for businesses to raise cash, to pay for capital expansion, to pay for trying to find new markets or new suppliers or to try and take on more workers or replace existing equipment. So all of those things raise the cost of doing business in Canada.”
Lander also says it’s Canadian businesses that don’t have as much market competition, like with groceries, telecommunications and banking, which may find it easier than other sectors to raise prices for consumers when faced with higher costs.
“Will it spill over to the consumer? Yeah, it’s gonna spill over because firms aren’t afraid to pass along that cost to the consumer because there’s nobody there to come and steal their business by undercutting them.”
