Bonds are central to the global financial system, and when their yields rise it can have a significant impact on your finances.
Bond yields – the amount that bonds pay in interest as a percentage of their price – are reaching all-time highs.
In August, yields on 30-year US government bonds (Treasuries) rose to over 5.3% , the highest level since June 2007. The yield on 10-year UK government bonds (gilts) rose above 5.29% on 2 September, the highest level for 19 years.
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While higher yields might sound l positive, they actually reflect falling bond prices and a lack of confidence in the bond’s issuer’s ability to meet payment obligations.
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In the case of gilts, when yields rise, the market price of existing gilts fall, making them less attractive for investors. Rising bond yields will also make any debt you hold more expensive, and could lead to tax hikes.
That said, from a macroeconomic standpoint, it could be argued that higher bond yields are necessary.
“One argument is that the rise in bond yields is not bad news, but good news, because it is a logical result of healthy economic growth rates,” said Russ Mould, investment director at investment platform AJ Bell. “It may also represent a return to normality after the crazy days of the 2010s and early 2020s, when headline interest rates and benchmark bond yields were near zero. That implied a cost of money, and time, of almost zero, which made little real sense.”
Why are bond yields rising
The current bond sell-off is being driven by several factors: in part including the threat of higher inflation due to the ongoing Middle East conflict, as well as the increased likelihood of central banks hiking interest rates in order to combat this inflation.
“Markets are now pricing in three hikes from the Bank of England over the next year,” said Matthew Amis, investment director, rates management at Aberdeen Investments. “Gilt yields look elevated here but until oil and gas start freely moving in the Straits of Hormuz, gilt yields are going to struggle.”
At the same time, bond markets are spooked by escalating levels of government debt. US government debt recently passed $40 trillion; in 2025, US government debt was already over 123% of the country’s GDP.
Oliver Faizallah, head of fixed income research at wealth manager Raymond James, attributes the bond yield spike specifically to US Federal Reserve (Fed) chair Kevin Warsh’s recent comments at the central bank’s Jackson Hole Economic Symposium on 28 August.
“We received no new information in the form of new macroeconomic data points, however a firmly hawkish tone from Warsh was enough to move markets,” said Faizallah. Warsh pointed to the strength of the US economy as well as his commitment to bringing inflation below the Fed’s 2% target.
“This resulted in markets pricing in more than two hikes by the Fed over the next 12 months,” said Faizallah.
How are bond prices, inflation and interest rates linked?
Bonds are sensitive to inflation. The amount that a bond pays to its holder is fixed in nominal terms (which is why bonds are referred to as ‘fixed income’), so if inflation rises, the real value of the bond to its holder falls. When bond prices fall, yields rise.
Bonds are also sensitive to interest rates – the rate of interest that central banks, like the Bank of England, pay to banks and other financial institutions that deposit money with them. Higher rates typically mean lower bond prices and higher yields, particularly on short-dated bonds, and these are the ones that have the biggest impact on mortgage and cash savings rates.
When anyone borrows money – be it the government or a couple buying a property – they have to offer the lender a better return than they would get by depositing their money at the central bank. So interest rates directly impact bond prices; when they rise, the cost of borrowing rises for everyone – governments, businesses and individuals.
What higher bond yields mean for your personal finances
Higher borrowing costs will have impacts across your finances.
“Credit card, mortgage and auto loan interest rates will rise if bond yields rise, as the lenders seek to preserve loan book margins and manage their risk,” said AJ Bell’s Mould.
Worryingly, higher bond yields could also lead, indirectly, to higher taxes. High gilt yields mean that the UK government is paying more interest on its debt. That will limit what chancellor John Healey can do when he announces the Autumn Budget in October.
The government’s fiscal rules prevent it from borrowing money to pay for day-to-day spending, and require debt to be falling as a share of the economy by 2030; any increase in current borrowing costs will have to be made up for with higher tax take.
On the other hand, higher interest rates would mean that you earned more money as interest on savings and cash.
How do higher bond yields impact the stock market?
Higher bond yields can also have a large impact on the stock market.
When professional (and some more sophisticated amateur) investors estimate the present value of an investment, they will do so by comparing the future returns they expect from it to current bond yields (in other words, the alternative ‘safe’ investment they could make instead). This is known as a discounted cash flow model.
The higher bond (and especially gilt) yields rise, the less appealing, in relative terms, a stock whose price is based on years worth of future returns becomes. Why take the risk on a company which could fail if you can make good returns with less risk in the bond market?
Higher bond yields could therefore mean “lower theoretical equity valuations, especially for companies whose strongest years of profit and cash generation may be some time in the future, such as technology and biotechnology companies”, said Mould.
“For now, higher bond yields are not unduly inconveniencing the FTSE 100, which still trades close to all-time highs, within touching distance of the 11,000 mark and up by more than 100% from the Covid-19 lows of March 2020,” Mould continued. “But in the end, weight stops trains and racehorses and higher returns on cash and fixed-income securities slow down stock markets – it is a matter of degree.”
Mould added that if the Bank of England hikes interest rates or if bond yields rise further, the UK’s stock market could start to struggle. “In a worst case: earnings growth could take a hit if higher borrowing costs cool consumer spending and corporate investment; takeovers could dry up if the cost of any debt used to fund them means such deals are no longer attractive; and higher yields on bonds make the yield on equities look less appealing.”
Should you invest in bonds?
Bond prices are falling; the returns you’re making on them (the yield) is rising, so is this a good time to buy bonds?
The issue is always one of risk. With corporate bonds, the risk is that the company you’re buying the bond from might default.
Government bonds in a developed economy like the UK would almost certainly never default on its debt. It is more likely to print money – thereby devaluing the currency – in order to meet its obligations. That means the main risk with government bonds is inflation.
Raymond James’s Faizallah believes that, while the recent bond selloff isn’t unwarranted, it means the risks to bonds are now priced in.
“As it stands, bond yields are priced for higher and prolonged second round inflation, consequent central bank hikes, and further government spending driven by an increase in bond sales,” he said. “With the bad news in the price, there is a limitation to how much further bond yields can keep climbing.”
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