Interest rates have jumped by about 1.3 percentage points since the Iran war began in February. That’s a sharp increase in a short period of time, which might indicate trouble in financial markets. While higher rates make it costlier to borrow money, they can also ding stock prices and trigger a recession if borrowing and spending slow too abruptly.
Should you sell your stocks and activate your bugout plan? Probably not. Economists think rising rates in the bond market certainly signal something—just not Armageddon.
“Is the bond selloff a looming debt crisis? Not yet,” economist Ed Yardeni of Yardeni Research wrote in an October 5 analysis. “If we had to place the bond market at a point along the spectrum of drivers, it would be closer to the benign side.”
One factor pushing rates higher is the sheer amount of debt being issued by the US government and other nations. The US national debt tops $40 trillion and Washington now routinely borrows $2 trillion per year to fund itself. If there aren’t enough buyers of that debt, rates have to rise, which means Washington has to pay even more to borrow and interest payments might eventually become unsustainable. We may be in the early stages of such a debt spiral.
[Believe it or not, the economy is strong]
But rates are also rising because of the surge in energy prices related to the Iran war—which won’t last forever. Once oil supplies return to normal levels and prices fall, pressure on interest rates could ease.
A third factor pushing rates higher is a reversion to normal after a period of unusually low rates. “For years, yields were below where the economy said they should be,” Jim Bianco of Bianco Research wrote in an October 5 explainer on the bond market. “That is no longer the case.”
The average yield on the benchmark 10-year Treasury since 1980 is 5.6%. But from 2009 through 2025, the 10-year rate averaged just 2.72%, roughly half the historical norm. That’s because the Federal Reserve undertook extraordinary measures to slash rates during the Great Recession in 2009, and moved extremely slowly to unwind that stimulus. When Covid hit in 2020, the Fed pushed rates even lower.
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That period of abnormally low rates is over. Since the Iran war started in February, the 10-year Treasury rate has jumped from 3.97% to about 5.28%—the highest level since 2002. Even if the rate isn’t that high, historically, fast, unexpected changes in rates can be destabilizing if they rapidly raise borrowing costs for consumers and businesses that aren’t ready for it.
How do we know when we’re in the danger zone?