Could this flashing warning signal sink the ASX 200 rally?

On Wednesday, the US 30-year Treasury bond (“T-bond”) yield surged to 5.1%, an 18-month high, following a weak bond auction that underscored faltering investor confidence in US debt securities. The benchmark 10-year T-bond yield also climbed to 4.6% – and both critical market yields are up around 0.50%, or 50 “basis points” since the start of the month.

Ok, bonds are boring. “Why should I care?” I hear you ask!

I’m here to tell you that bonds aren’t boring, rather, they’re the most important driver of the share prices in your portfolio – yes, yours!

Well, yours, mine, and everyone else’s, too. This is because bond yields, particularly benchmark bond yields like the US 10-Year and 30-Year T-bond yields, set the price of risk-free money. This just means that when your bank borrows roughly 10 cents to lend you or your next-door neighbour $1, the rate they’re charged by their lenders depends largely on these benchmark bond yields.

Basically, any person or company that has debt and is paying interest on that debt, is at least in some way impacted by the level of benchmark bond yields. Therefore, I suggest it is super important when we read headlines like “US 30-year Treasury bond yield surges to 18-month highs”.

In this article, I’ll unpack the developments of the last 24-hours in stock and bond markets, as well as recent trends in US T-bond yields, to explain why they are indeed important to your portfolio. Will this latest spike in T-bond yields torpedo the current stock market rally?

Why are US Treasury bond yields rising?

Let’s first put that 50 basis points rise since the start of the month into perspective. Consider that the US Federal Reserve usually deals in 25 basis point moves. This means that the market, not the Fed, has applied two full interest rate increases to the critical benchmark yields that help set the price of risk-free money around the globe.

Before we discuss the impacts of this increase, let’s discuss why it’s happening. First note, there is an inverse relationship between bond yields and bond prices. This just means that the recent spike in bond yields has occurred because bond prices have fallen sharply.

So, bond traders are selling their US T-bonds in droves, driving the price of those bonds down and their yields up. Perhaps the headline should read “Traders dump US Treasury bonds at fastest rate in 18-months”? It would be just as true.

Why are bond traders getting out of US T-bonds? This is at least partly due to growing concerns about the US’s fiscal health and economic stability. Markets are increasingly anxious about President Trump’s trade policies, the volatility of his administration’s broader economic agenda, and the US government’s escalating debt burden.

Wednesday’s trigger was a poorly received auction of 10-and 30-year bonds by the US Treasury. The chart below shows how US 30-year bonds have risen to their highest level since October 2023. More broadly, they’re now probing highs not seen since the month before the GFC started, but that’s probably pure coincidence, right? 🤔

Two critical risks may potentially emerge as a result of the recent move in US T-bond yields, and potentially grow more influential to stock prices if it continues:

1. The strain on the US’s ability to service its $33 trillion debt.

2. The broader economic fallout, particularly through rising mortgage rates.

The US debt burden and rising interest costs

The US government’s debt has ballooned to $33 trillion, fuelled by chronic fiscal deficits and increased borrowing to fund government spending and to refinance existing obligations. The US Treasury issues bonds, including the 10-year and 30-year durations discussed here, to cover these deficits and to service government debt.

Wednesday’s tepid investor demand means the Treasury must issue bonds at a higher interest rate to entice further investment. This means a higher interest rate the US government must pay to stay funded and to pay its burgeoning debt.

To put recent bond market moves into perspective, consider that the US’s annual interest payments are just over $600 billion. A 50 basis points increase in average interest rates across the Treasury’s debt portfolio could add $165 billion annually to interest payments, assuming the entire $33 trillion is refinanced at prevailing higher rates. To put this in perspective, the US’s 2024 federal budget was $4.4 trillion – just servicing the debt is becoming big bikkies.

It's going to start to hurt at some point, and the growing cost of servicing the US government’s debt could force reductions in its discretionary spending or necessitate further borrowing – risking a debt spiral. The US Congressional Budget Office has already warned that without policy interventions to curb spending or raise revenues, deficits will persist, undermining debt affordability.

The recent T-bond auction’s poor performance highlights a growing risk: If demand for U.S. debt weakens further, yields could climb even higher, exacerbating fiscal pressures.

Link to mortgage rates and economic impact

The rise in 30-year T-bond yields also directly influences US mortgage rates, which are closely tied to the 30-year T-bond yield due to the similarity in their respective durations. Data from CNBC suggests that the yield on the typical 30-Year fixed rate mortgage in the US rose 6 basis points on Wednesday to 7.05%. This is up 24 basis points from the start of the month, and 50 basis points from the start of April.

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Whilst the correlation between US T-bond yields and mortgage rate can vary significantly depending on many other factors such as employment, the health of the US economy, and the health of the US housing market, it’s fair to say that higher T-bond yields generally flow through to increased mortgage financing costs.

To put the recent move into perspective, the 24 basis points increase in mortgage rates since the start of the month, from 6.81% to 7.05% on a typical $400,000 30-year loan, raises monthly payments by about $300, or $3,600 annually. This means substantially less money in the pockets of US consumers, and that’s not good for the US economy or US corporate profits.

The economic risks of higher mortgage rates in the US will likely be exacerbated by the fact their housing sector is such a key economic driver, particularly through employment in the construction sector, but also via housing-related consumer spending.

Beyond housing, higher borrowing costs impact auto loans (currently at 7.62%, a 16-year high), student loans (6.53%, a 10-year high), and corporate investment.

Conclusions

The goal of this article is to put this flashing warning signal of rising 10 -and 30-year T-bond yields on your investing radar ⚠️.

Hopefully I have succeeded.

As with most economic flashing warning signals, regulators – who are tasked with doing everything within their control to not crash the economy – tend to mitigate such risks before they get too far out of control. However, we only need to think back to the GFC to remind ourselves of when the warning signs were ignored until it’s too late.

Wednesday’s surge in the 30-year T-bond yield is a heads-up to investors that markets are increasingly baulking at funding Uncle Sam’s IOUs. This yield spike threatens the government’s ability to service its burgeoning debt, and because of the linkage to US mortgage rates – also threatens the US economy.

US stocks fell between 1-1.5% on the bad bond market news overnight, and our ASX 200 is following suit today. That’s proof that the bond market is on stock market investors’ radar.

Only moderately for now, but if these trends persist, it will likely grow as US policymakers face a delicate balancing act to stabilise investors’ faith in the country’s long-held place as the primary destination for global investment capital.

This article first appeared on Market Index on Thursday 22 May, 2025.