Surging bond yields have raised borrowing costs for households, businesses and governments

Bond yields are surging, and investors are starting to get a little more worried.

The surge in bond yields to generational highs has investors around the world watching and worrying about what could crack, spiral or leave a trail of carnage in its path.

French bond yields BX:TMBMKFR-10Y in the past week raised alarms about another possible European debt crisis. The spillover played a role in a brief burst of appetite for battered U.S. Treasury bonds to start October.

Then came Friday's U.S. jobs report - which underwhelmed Wall Street, took the odds of a Federal Reserve interest-rate hike in October below 20%, and triggered more swings in U.S. government bonds.

Things briefly were looking better Friday, said Yulia Alekseeva, head of fixed income at MissionSquare, after the labor-market report. But then selling picked up once again as the session wore on.

The benchmark 10-year Treasury yield BX:TMUBMUSD10Y has already surged about 55 basis points over the past five weeks to 5.28% on Friday, according to Dow Jones Market Data. That's near highs last seen in 2002.

The dizzying selloff has put many bonds underwater. The worry is that investors facing a sea of red in their fixed-income portfolios could become forced sellers or pull money from bond funds that have been flush with inflows in 2026.

Trading action has been volatile and even messy at times. There's been talk of bargain hunting and fears of catching a falling knife. On Wall Street, the big debate is whether 5% yields are a ceiling - or a new floor.

"It's the first time I heard this question being raised," said Alekseeva. That matters because economies and markets that grew up around near-zero rates and easy monetary policies are still adjusting to the new backdrop, she noted. "This era is over, but it's hard to acknowledge from a pricing perspective."

That means the cost of capital rises for households, companies, the U.S. government and other major economies financing large deficits. In June, Treasury Secretary Scott Bessent warned that the bond market has taken down more governments historically than howitzers.

The gigantic funding needs of the artificial-intelligence build-out also become more expensive to finance as yields climb. To be sure, those extra costs might not matter as much to megacap companies like Amazon.com (AMZN), Alphabet (GOOGL) (GOOG), Meta Platforms (META), Microsoft (MSFT) and others that view the AI spending boom as necessary to their long-term survival.

But weak spots have surfaced, including in the performance of SoftBank's (JP:9984) $(SFTBY)$ bond deal at the end of September and new debt issued by Paramount Skydance (PSKY) to buy Warner Bros. Discovery $(WBD)$.

"Credit is a little bit choppy," said Mike Sanders, head of fixed income at Madison Investments, on Friday. "People are definitely a little bit more cautious than a couple of months ago."

The extra compensation, or spread, investors require to offset rising risks have moved up accordingly. Spreads have climbed sharply in riskier parts of the corporate bond market, but remain near historical lows for highly rated debt. When a default wave appears to be looming, spreads tend to shoot higher, acting as a canary in the coal mine. That hasn't happened yet.

On the other hand, yields on highly rated U.S. corporate bonds eclipsed 6% this week for the first time since 2023. That's mostly due to the spike in Treasury yields.

Big round yields like 6% tend to attract new money looking for relatively safe places to earn a decent return over a fixed period, said Travis King, head of U.S. investment-grade corporates at Voya Investment Management.

However, the path higher has been sharp and uncomfortable. When that happens, companies tend to rethink their borrowing needs, which can result in a pullback in bond issuance or more issuance for shorter periods of 10 years or less, King noted.

Beyond the corporate debt world, borrowers with older commercial real-estate loans have been struggling to keep up in the higher-rate regime.

A simple way to show that pain is to track the rate of "specially serviced" commercial property loans in bond deals. The rate includes delinquent loans and likely borrower defaults.

That rate hit a fresh high of 12% on pools of conduit loans that include retail, office, hotel, multifamily and other property types, according to Deutsche Bank data. That's well above the 8.5% COVID-era peak following 2020 lockdowns.

"Hopefully, things will kind of calm down a little bit going into year-end," said Joyce Huang, senior fixed-income portfolio manager at Vanguard.

-Joy Wiltermuth