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Bond yields in both the United States and Canada are climbing sharply, and financial experts warn that consumers could face higher borrowing costs for an extended period. Rising government debt, the ongoing war with Iran, and an escalating trade war are all pushing investors to demand greater returns for holding long-term bonds. The result is a ripple effect that touches mortgages, car loans, lines of credit and everyday business costs.
Bond Yields Reach Multi-Year Highs
The yield on the 10-year U.S. government bond recently rose to approximately 4.9 per cent — the highest level since 2023. That figure represents an increase of 0.8 percentage points since the start of September. Earlier, in July, the 30-year U.S. bond yield briefly exceeded five per cent, a level not seen since 2007.
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Meanwhile, Canada’s 10-year government bond yield reached about 3.9 per cent, its highest point in nearly two years. Much of that spike occurred at the start of the month, coinciding with Canada’s retaliatory tariffs on U.S. goods taking effect. Economists noted that the tariffs added further pressure on inflation expectations.
Bond yields rise for many reasons. However, a sudden sharp increase typically signals that investors are worried about inflation, government debt or broader economic uncertainty. As a result, they sell bonds to reduce their exposure to risk, which pushes yields higher.
Clay Jarvis, a mortgage and personal finance expert at NerdWallet Canada, pointed to several converging pressures. “You have these higher oil prices because of the Iran war and that’s stoking inflation fears,” he said. “You’re seeing treasury yields in the U.S. spike, and that’s because investors are demanding a higher return on lending the government their money because they see so much risk there.”
Why Investors Are Growing Nervous
Kana Norimoto, an asset allocation researcher at Fidelity Investments, explained the dynamic in a statement released Wednesday. Long-term bond investors are trying to anticipate changes in interest rates, inflation and government spending. “When the future feels unpredictable, investors want a bigger payout to take on the risk of holding onto long-term bonds,” she said.
Moshe Lander, an economics professor at Concordia University, offered a blunt assessment. “People are starting to look a little nervous if they’re holding large amounts of government bonds,” he said. He added that rising yields do not reflect more productive government spending. Instead, they reflect the growing cost of financing a deficit that investors now view as riskier.
“That’s not the type of thing that attracts people,” Lander said. “It could actually make them run away, and it could actually exacerbate the problem.”
The Iran conflict has also driven oil prices sharply higher. TD Bank senior economist Vikram Rai noted in a Thursday report that oil prices jumped back above US$90 per barrel after the Middle East ceasefire collapsed — the highest level since early June. “Since the relative low in yields before the conflict with Iran, 10-year yields have risen by about 80 basis points in the U.S. and 60 basis points in Canada,” Rai said.
In addition, rising U.S. government debt is pushing yields higher. Rai explained that some traditional buyers of U.S. government bonds have stepped back. “Private investors must therefore absorb a growing share of government debt and are demanding higher yields to do so,” he said.
The Impact on Consumers and Businesses
Higher bond yields create real affordability challenges for ordinary consumers. They influence interest rates on fixed-rate mortgages, car loans, lines of credit and student debt. Although the Bank of Canada’s policy rate affects short-term borrowing costs, bond market movements have a stronger influence on long-term rates.
Jarvis highlighted the mortgage market as a key area of concern. “A lot of people have their eyes on fixed mortgage rates in Canada, three years and five years, because those yields have been driven sky high,” he said. “When these bond yields increase, you often see banks and other lenders increasing their three and five-year fixed rates.”
Beyond mortgages, higher borrowing costs can also push up prices for goods and services. When businesses face higher financing costs, they may respond by raising prices, cutting costs elsewhere or improving productivity. However, not all businesses face the same competitive pressure to absorb those costs.
Lander pointed to sectors with limited competition — such as groceries, telecommunications and banking — as particularly likely to pass higher costs on to consumers. “Will it spill over to the consumer? Yeah, it’s gonna spill over,” he said, “because firms aren’t afraid to pass along that cost to the consumer because there’s nobody there to come and steal their business by undercutting them.”
For businesses more broadly, the consequences are also significant. Lander warned that higher bond yields make it more expensive for companies to raise capital, expand operations, find new markets or hire additional workers. “All of those things raise the cost of doing business in Canada,” he said. For consumers already managing tight budgets, the combination of rising borrowing costs and potential price increases presents a serious financial challenge in the months ahead.
