The bond market is sending a loud warning. The 30-year Treasury yield just hit a level it has not touched since 2007. Mortgage rates and the rest of the economy are coming along for the ride.
A yield is the rate a bond pays. When yields rise, bond prices fall. Treasury yields set the floor for most other borrowing costs in the country.
The Iran war is the main driver. It is now 80 days old. Oil and gas prices sit at four-year highs because the Strait of Hormuz is mostly closed. That has pushed other prices higher too.
US consumer prices in April rose at the highest annual rate in three years. That added more fuel to the bond market move.
The 10-year Treasury yield matters most for households. It was just below 4% before the war. It now sits at 4.67%, the highest in over a year. The 2-year yield, which tracks Fed rate bets, has also climbed to a one-year high.
"Bond markets are warning that inflation could prove much stickier than many investors anticipated," said Nigel Green, CEO of deVere Group.
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Treasury yields set borrowing costs across the economy. Mortgage rates, auto loans, business loans, and credit card rates all move with them.
For decades, mortgage rates have tracked Treasury yields lower. That pattern is breaking. Rates are now climbing along with yields. The latest Freddie Mac survey put the 30-year fixed mortgage rate at 6.36%.
Higher yields are also a headwind for stocks. They make bond returns look more attractive. They squeeze company values too. On the day of the selloff, the Dow fell 0.46%. The S&P 500 sank 0.7%. The Nasdaq dropped 1.1%.
It is not just oil pushing prices up. Chicago Fed President Austan Goolsbee says inflation is spreading past oil and gas into services prices, which is the part of the basket the Fed worries about most.
Investors around the world are dumping long-term government debt. The UK's 30-year gilt yield is at its highest since 1998. Japan's 30-year yield just hit a record.
Government deficits keep growing. Defense spending keeps rising. Investors are demanding more to hold the debt. Briefs covered the 5% break on the 30-year line earlier this week, and the move has only stretched since.
"The forces driving the sell-off - fiscal deterioration, defense spending, sticky inflation, central bank paralysis - are not resolving in the next week," said Ajay Rajadhyaksha, global chairman of research at Barclays. "They are getting worse."
The next big level on the 10-year is 4.8%. The yield has only closed above that a handful of times since 2007.
New Fed Chair Kevin Warsh, who was confirmed by the Senate on May 13 in a narrow 54-45 vote, has now taken over the central bank just as the bond market sends its loudest signal in years.
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