As U.S. homebuyers scrutinize the surge of mortgage rates and debate the Federal Reserve’s next move, an even bigger story has been unfolding across global trading floors that directly affects Americans’ pocketbooks.
For the past month, global bond markets have been in the grips of a historic sell-off triggered by a tangle of complex economic issues ranging from the ongoing war in Iran to rising deficits to the race to build out data centers to power artificial intelligence.
While at first glance it might seem that the realm of high finance is far removed from homebuyers’ affordability hurdles and climbing monthly mortgage payments, these market moves are a key factor influencing housing costs.
One thing to keep in mind is that the Federal Reserve does not directly set mortgage rates. The central bank instead controls the overnight rate for lending between commercial banks, while mortgage rates are set by the free market.
Mortgage rates closely follow the 10-year Treasury yield, which moves in response to inflation signals and other signals about financial conditions. Persistent war-related oil shocks, with Brent crude topping $100 per barrel, have fueled worldwide inflation fears this year.
The 10-year Treasury yield, or the interest rate paid to bondholders, has climbed sharply in recent weeks, hitting a fresh two-decade peak of 5.36% this week, up from 4.67% in August.
Meanwhile, Freddie Mac’s average rate on 30-year fixed home loans went from 6.66% to 7.4% in about a month.
Realtor.com® senior economist Jake Krimmel notes that the difference for a buyer on a $2,000 monthly payment budget works out to roughly $19,000 less house, highlighting the real-world effects of financial markets on homebuyers’ finances.
Jay Hatfield, CEO at Infrastructure Capital Management in New York City, considers the global oil shortage and subsequent inflation to be the underlying cause of climbing rates.
“Even though people talk about [AI] hyperscale spending and the federal budget deficit, all that existed two weeks before the 10-year was at 4%, so that’s the key driver,” Hatfield tells Realtor.com.
Bond prices and yields move inversely. When bonds are offloaded en masse and their prices fall, yields are pushed up. Inflation is a key factor for the bond market, because inflation can wipe out the gains from fixed-income investments, prompting investors to demand higher yields.
Oil supply disruptions have fueled inflation concerns worldwide, prompting spooked investors to sell bonds on a scale not seen in years.
In doing so, bond yields rose, headlined by France’s 10-year yield surging to its highest level since 2002. Similarly historic routs were recorded in the U.K. and Italy. Due to the deep interconnectedness of global financial markets, the European panic quickly spilled into the U.S.
Yet, high oil prices and geopolitical tensions are not the sole culprits: Skyrocketing government debt and rising deficits continue to act as the quiet force steering this global sell-off.
The role of government debt and deficits
Major world powers are running eye-wateringly high fiscal deficits that are adding to their national debts, with the U.S. national debt exceeding $40 trillion and some European nations’ debt-to-GDP ratios at or above 100%.
As governments continue to run heavy deficits, they are forced to issue new government bonds. When bond supply outpaces natural market demand, prices fall and yields rise to attract investors. In some cases, this can create a vicious cycle in which rising interest rates add to deficits, forcing even more bond issuances.
A case in point is France, where a lack of currency sovereignty, sluggish economic growth, and political paralysis raise long-term risks of a sovereign debt crisis, analysts say.
France’s public debt is inching toward 120% of GDP, while its budget deficit remains one of Europe’s largest. Following the snap election of 2024, the French Parliament has been deeply divided and ineffectual in passing meaningful spending cuts.
Investors are skeptical that next year’s presidential election will lead to the implementation of necessary spending reductions or tax increases, contributing to anxiety about a possible default on government debt.
While some analysts have raised the specter of a similar debt spiral in the U.S., Hatfield argues that it is much more of a concern overseas.
“It’s extremely unlikely in the U.S. because the economic growth is strong and the debt-to-GDP is stable,” he notes. “Europe is way worse. France has the highest yields in the Eurozone. France is unhinged, and I would watch that.”
Hatfield is optimistic that unlike Eurozone economies, the U.S. can “grow out of our problem,” even though he does not foresee the federal government acheiving a balanced budget anytime soon.
AI spending also a factor
Then are also questions about how massive spending on artificial intelligence may affect global and domestic bond markets.
Hyperscalers and tech giants such as Amazon, Alphabet, and Meta have been issuing corporate bonds to fund new data centers.
Essentially, this forces investors with a finite amount of capital to choose between these high-grade corporate bonds and U.S. Treasuries, putting pressure on the government to boost yields to stay competitive and lure buyers.
However, Hatfield downplays the impact of AI capital expenditures on rates, reminding that the AI boom existed before the outbreak of the war with Iran in February.
“Everybody wants to blame AI for every problem in the world,” he says.
What the future holds
Krimmel argues that elevated 10-year yields are something that consumers will have to get used to.
“There are structural factors already pushing yields up, including expectations about growth and future spending in an AI-driven economy, a higher neutral interest rate as a result, and increased competition for capital,” he says.
On top of that, the market has to contend with other inflationary pressures like global supply shocks that keep cropping up, plus a shakier domestic fiscal picture.
Hatfield is even blunter on that point, forecasting a recession for the U.S. residential real estate market.
“We’re already in a housing recession, and we expect it to get significantly worse,” he argues.
Analysts and traders say that the current bond market turmoil could get worse before it gets better, which could mean higher mortgage rates for the foreseeable future.
