The yield on U.S. government bonds, especially 10-year Treasury notes, determines the interest rates that people pay on most of their debts, including mortgages and credit cards.

The Federal Reserve has kept interest rates stable, but hints at further actions later this year.

The yield on 10-year Treasury bonds, which many consider one of the least risky investments in the world, briefly exceeded 5% on Monday. It hadn't been that high since June 2007 when George Bush was in the White House, and Ben Bernanke was leading the Federal Reserve.

This is an unpleasant trend considering that for many years, the U.S. economy has benefited from ultra-low interest rates.

What's causing the recent bond sell-off?

The main reason is that economic data has turned out stronger than expected.

Although a stronger economy is generally good news, the Fed currently needs a cooler economy to reduce inflation.

This means that the Fed may have to continue to maintain high interest rates for some time, given that inflation remains above the Fed's target of 2%.

Wall Street is also concerned about the growing level of U.S. government debt, which is a major reason why Fitch Ratings decided to downgrade the country's bond rating from AAA to AA+.

There are also more technical reasons. One of the important ones is that demand for bonds from an institution that has been one of the largest buyers of them for many years, the Federal Reserve, has decreased.

During the COVID-19 pandemic, the central bank bought trillions of dollars in fixed-income securities. However, starting in 2021, it has been reducing the size of its portfolio to help reduce inflation by withdrawing some money from the financial system.

"Conditions are getting even more challenging without the Fed as a first, last, or any other resort buyer," Nixon said.

Why are bond markets important?

Bond yields are crucial for the economy because they influence the interest rates that people pay on credit cards, auto loans, and mortgages.

Higher bond yields also affect companies by increasing the cost of debt for businesses.

Higher borrowing costs can harm the economy as individuals and companies cut back on spending in the face of high interest rates.

Take, for example, the housing sector, which is a vital part of the economy, and mortgage rates are one of the most sensitive to interest rates.

According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage is currently 7.63%. This is the highest it's been since 2000 and is contributing to a decline in existing home sales as people who bought homes when mortgage rates were lower don't want to give up their lower rates.

Interest rates on credit cards are also rising, as are interest rates on auto loans. According to the latest Federal Reserve Bank of New York's "Quarterly Report on Household Debt and Credit," credit card balances stand at $1.03 trillion, a record high.

Additionally, many banks invest significant amounts in government bonds, making them vulnerable to rising yields.

This year, Silicon Valley Bank and two other regional lenders went bankrupt in part due to concerns about the state of their bond investments. This led to a massive withdrawal of bank deposits.