Yields on Treasury bonds rose sharply this week, with the 30-year note climbing over 5% - the highest level in 19 years. For the government, that means borrowing to finance deficit spending just got pricier. For consumers, it could mean higher mortgage rates. And this isn't just a U.S. party: yields for government bonds in Japan hit their highest level ever, while the U.K. saw a 28-year high.
Greg Ip, chief economics commentator at The Wall Street Journal, joined NPR to explain what's driving this. He pointed to three culprits: inflation that never really went away after COVID (now juiced by energy prices from the war against Iran and the closure of the Strait of Hormuz), government deficits that are bigger than ever outside wars or emergencies, and a global tilt toward populism that has killed any political will to make hard decisions. "Investors are slowly coming to the realization that the things that are bothering them now are going to be around for a very long time," Ip said.
For the average American consumer, the outlook is grim. Higher inflation means the Federal Reserve will struggle to justify lowering short-term rates, which could push mortgage rates even higher. Borrowing costs will weigh on the economy and stock market. And for taxpayers, the bill is coming due: U.S. debt now equals over 100% of GDP, virtually unprecedented in the postwar era. Interest payments will squeeze out money for social programs or defense, pressuring Congress to eventually raise taxes.
As for retirement savings in 401(k)s or IRAs, Ip called the effect "ambiguous." Higher yields mean more income from annuities and bonds, but that's partly illusory because inflation is eating into purchasing power for food, gasoline, cars, and houses.
Deficits and inflation are feeding each other. Governments respond to inflationary spikes - like the oil price surge - by borrowing more to protect households (Japan) or suspending gas taxes (President Trump). That makes bond investors worry that central banks won't be allowed to raise rates enough to control inflation. If the Fed is pressured to keep rates low to protect the budget, inflation could get even higher.
Is there a path back to low, stable inflation? Ip says the key is central banks doing their job. Markets currently expect the Fed to bring inflation back to 2% in two to three years, but that requires Fed Chair Kevin Warsh to do unpopular things like raising short-term rates. "Although it sounds contradictory," Ip noted, "that may be what is necessary to get interest rates lower in the very long term."