Bond yields are climbing to levels unseen in over a year, fueled by concerns that President-elect Donald Trump’s proposed tariffs may trigger rising inflation. Coupled with strong economic data that reduces the likelihood of additional interest rate cuts, yields are surging, which could strain household budgets and portfolios.
While some financial analysts warn about the impact on stocks, rising bond yields also have broader implications that advisors should monitor closely. Below is a breakdown of four key areas affected by the sharp rise in the 10-year U.S. Treasury yield, which has increased over 100 basis points since mid-September, inching closer to the critical 5% mark.
1. Retirement Accounts: Pressures from Rising Yields Rising interest rates create challenges for retirement portfolios, particularly for clients with substantial bond holdings. As yields rise, bond prices fall, leading to potential negative returns on fixed-income investments.
A similar scenario unfolded in 2022 when the 10-year U.S. Treasury yield more than doubled to around 4%, and the Bloomberg Aggregate Bond Index fell 13%. That same year, the S&P 500 dropped nearly 20%, compounding losses for retirement portfolios.
Since the latest yield surge began in September, the Bloomberg index has declined nearly 6%, impacting retirement accounts heavily weighted in bonds. This decline is particularly concerning for clients nearing or in retirement, as they typically hold a higher proportion of fixed-income securities to manage risk.
The equity market has also felt the pressure. The S&P 500 has dropped about 4% since December when concerns about rising bond yields resurfaced, further weighing on client portfolios.
2. Mortgage Rates: The Housing Affordability Squeeze One of the most visible effects of rising bond yields is the spike in mortgage rates.
Despite the Federal Reserve implementing interest rate cuts in September, mortgage rates have continued to climb. Freddie Mac reports that the average 30-year fixed mortgage rate has surged nearly 1 percentage point to around 7% since the yield increase began.
For clients considering purchasing a home at the median U.S. sales price of $420,000, this rate increase translates to over $200 more in monthly mortgage payments—an additional $2,500 annually.
Homeowners with adjustable-rate mortgages (ARMs) are also feeling the impact, as their payments adjust to reflect higher interest rates. Even renters may not escape the ripple effect, as landlords facing higher financing costs may pass those costs along when leases are renewed.
Advisors should encourage clients contemplating home purchases or refinancing to consider locking in fixed rates before yields climb higher or weigh alternative housing strategies.
3. Auto Loans: Rising Costs of Vehicle Financing Auto loan rates are closely tied to the five-year U.S. Treasury yield, which has risen alongside the 10-year yield by about 100 basis points since September.
According to data from the St. Louis Federal Reserve, the average interest rate for a five-year auto loan has nearly doubled, reaching 8.4% as of August 2024.
For clients financing vehicle purchases, longer loan terms may seem appealing for lowering monthly payments, but they come with a significant trade-off. Extended loan terms, such as six or seven years, result in higher total interest paid over the loan's lifetime.
Advisors should educate clients about the potential pitfalls of extended-term auto loans and explore budgeting strategies that align with their financial goals.
4. Credit Card Debt: Rising Interest Burdens Higher bond yields are also pushing up interest rates on revolving consumer debt, including credit card balances and personal loans.
Since credit card debt is typically tied to the prime rate, which reflects movements in the federal funds rate, clients may see their interest rates rise significantly despite the Federal Reserve’s recent rate cuts.
Data from the St. Louis Federal Reserve shows that average credit card interest rates have risen from 15% in early 2022 to nearly 22% today. This 7-percentage-point increase significantly raises the cost of carrying a balance.
A NerdWallet survey found that U.S. households with revolving credit card debt carry an average balance of nearly $10,000. Sara Rathner, a credit card expert, cautions that clients making only the minimum payment could take over two decades to pay off this balance, incurring triple the original debt in interest.
Advisors should work with clients to develop actionable debt-reduction plans, emphasizing the importance of paying more than the minimum and prioritizing higher-interest balances.
Client Guidance and Proactive Planning
As bond yields continue their upward trajectory, it’s crucial for wealth advisors to provide proactive guidance tailored to individual client circumstances. From rebalancing portfolios to exploring refinancing options and debt management strategies, the rise in bond yields presents both risks and planning opportunities.
By staying informed and engaging clients with timely, personalized recommendations, advisors can help mitigate the negative impact of rising interest rates and position clients for long-term financial resilience.
