MW Why the government's debt problem is your borrowing problem - but also your opportunity to save

Andrew Keshner

People shopping for a car loan or a mortgage should understand the implications of high bond yields

People who need financing in order to buy a car or a home need to consider the price and their budget - and they may also want to keep an eye on the Treasury market.

Higher yields on Treasury debt are in sharp focus as lawmakers weigh how much they can add to the federal deficit with the Republicans' massive tax and spending bill now under consideration in the Senate.

Investors have been paying attention, with yields in recent weeks for the 10-year Treasury note BX:TMUBMUSD10Y and the 30-year bond BX:TMUBMUSD30Y hovering around their highest levels since 2007. Stocks have yet to give up on their recovery since their April 8 lows, but there's still a risk that bigger tariffs in 2025 and higher bond yields will cut into corporate earnings and weigh on the economy.

People shopping for a car loan or a mortgage should also understand the implications of bond yields in the nearly $29 trillion Treasury market, given their link to consumer borrowing costs.

"The reason people ought to be paying attention is the cost for the lender is, broadly speaking, going up," said Tim Quinlan, a managing director and senior economist at Wells Fargo $(WFC)$. "It's not a unique opinion that the rising national debt and rising budget deficits just contribute to the interest-rate rise."

How do macroeconomic issues affect the cost of a mortgage?

When lenders determine the interest rates they charge on mortgages, car loans and other sorts of financing, they look at the specifics and also at the big picture. Lenders consider market strategies and the creditworthiness of would-be borrowers, Quinlan said. They also weigh their cost of capital, which is where Treasurys come in.

Lenders generally use yields in the Treasury market - particularly for the 10-year note - as a building block for rates on many consumer loans. The 30-year fixed-rate mortgage is the clearest example.

The 30-year rate on new mortgages currently averages 6.89% on a weekly basis, up from 6.76% at the start of the month, according to Freddie Mac (FMCC). The yield on the 10-year note was 4.4% on Friday, up from 4.2% on May 1, according to FactSet.

Bond prices and yields move in opposite directions, so a selloff reduces the price and also increases the yield. For decades, Treasury yields rarely moved more than a few basis points a day. But huge swings to the upside since November's election have made it more costly for borrowers and more difficult for lenders to price new loans, with underlying benchmark rates being so volatile.

Currently, several factors add up to "a big selloff in the bond market," said Lawrence Gillum, chief fixed-income strategist for LPL Financial. Still, he added, "the debt and deficit spending is the primary reason."

The GOP megabill that passed in the House of Representatives by a single vote last week would extend President Donald Trump's 2017 tax cuts. It would also add more tax breaks that Trump campaigned on ahead of the 2024 election, including deductions for tip income and overtime pay.

Though the Senate will likely make changes, the House version of the tax bill would add $3.8 trillion to the deficit, according to the nonpartisan Congressional Budget Office. The federal debt already totals more than $36 trillion.

To afford its spending with less tax revenue, the government will need to issue more debt on top of what it's issuing already, Gillum said.

The major worry in the bond market isn't about a default where the government cannot pay its debts, he said. Rather, it's about supply and demand: A larger supply of Treasury debt tends to lead to a lower price for the investments and to higher yields.

As the tax bill moved through the House, Moody's lowered the U.S. government's credit rating from its top-tier label. The credit-rating firm cited rising interest costs and long-running deficits.

In a sense, the downgrade wasn't news, said Katie Klingensmith, chief investment strategist at Edelman Financial Engines. Moody's joined other ratings firms that had already lowered their ratings of U.S. debt over the years. "On the other hand, it got our attention really focused on fiscal policy. It may not be new, but it's not getting better," she said.

Trump administration officials see things differently.

Budget scorekeepers may be underestimating the GOP bill's economic impact and aren't accounting for a revenue infusion from higher tariffs, White House senior counselor for trade and manufacturing Peter Navarro argued in an opinion piece Wednesday. "The current rise in yields reflects fear - not facts," he wrote.

The U.S. Court of International Trade vacated most of the administration's tariffs Wednesday, but the levies were still in effect on Friday, at least temporarily, after a federal appeals court stayed the ruling's effect during the appeal.

Interest rates have been high for several years

Americans have faced higher interest rates for several years, long before the GOP's "big beautiful bill" materialized. During President Joe Biden's administration, home buyers saw rates for 30-year mortgages approaching 8% at points in 2023 and savers piled their money into cash, certificates of deposit and other fixed-income securities that were finally offering noteworthy yields.

To fight inflation and slow consumer spending, the Federal Reserve began hiking its short-term rate three years ago. The central bank eventually brought its benchmark rate to a nearly two-decade high in 2023-24. After making three rate cuts in the final quarter of 2024, the central bank is waiting to see the effects of new tariffs on inflation and the economy. The Fed also has been slowly reducing the size of its huge balance sheet, which can keep financial conditions more restrictive.

Given the uncertainties around tariffs and inflation, the Federal Reserve may not be able to cut interest rates again until 2026, and the 30-year fixed-rate mortgage will struggle to move much lower from existing levels without a U.S. recession, a BNP Paribas team said Wednesday.

The federal-funds rate is another benchmark that matters for consumer lending rates.

For example, many credit-card issuers use the prime rate as a starting point for their annual percentage rates, and then add an additional markup. The prime rate itself is generally 3 percentage points on top of the federal-funds rate.

Inflation and economic growth used to be the biggest storylines factoring into rates and yields, said Edelman's Klingensmith. Now there's also fiscal health, trade policies and the buyers and sellers of Treasury debt. "The kinds of headlines driving interest rates are much more complex and diverse," she noted.

Consumers have to consider not only yields, but also underlying Treasury prices.

There's some evidence car-loan rates can track along with the 5-year Treasury note BX:TMUBMUSD05Y, said Vadim Verkhoglyad, head of research at dv01, a Fitch Solutions company. Yields on the 5-year note have increased to 4% from 3.81% at the start of the month.

Still, "the impact of more auto tariffs - that matters so much more in the cost of a car than anything that may happen in rates," he said.

There's a silver lining for savers

Stocks generally move lower when yields go higher, and that can happen for a variety of reasons, Gillum at LPL explained.

Among other things, it's a signal of potentially higher borrowing costs for companies in the future. It may also be interpreted as a sign that fixed-income investments are more tempting than stocks for some investors, he said.

That's the silver lining for a person who wants to hold bonds and take the recurring interest payment, known as a coupon. "For savers, it's a fantastic environment. ... That's been our message to advisers and clients," said Gillum. "There's a plethora of income opportunities out there without taking on a lot of risk."

Klingensmith agreed that fixed-income securities have been gaining luster. "Now holding bonds can pay you something," she said. But it's not a simple solution for everyone, she noted: If bond yields move higher in the future, the value of a person's existing lower-rate bond portfolio can decrease.

Considering the benefits to savers is a different way of looking at the bond-yield volatility that's affecting loan rates and leaving some borrowers wondering when rates will retreat.

People have some ways to manage high rates, Klingensmith said. For home buyers and car shoppers, a good credit score is "all the more important," she noted.

Still, she said, the volatility "makes it really hard for you to make that long-term plan. That uncertainty can be a deterrent for investing and investing in yourself."

Joy Wiltermuth contributed.

-Andrew Keshner

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May 31, 2025 09:00 ET (13:00 GMT)

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