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The long-awaited interest rate cuts from the Federal Reserve in the final months of 2024 aimed to lower borrowing costs. Bond markets are refusing to cooperate, however, as last week’s fixed-income sell-off carried into Monday. The yield on the benchmark 10-year Treasury, which rises as the price of the bond falls, briefly surged above the 4.8% mark Monday morning, its highest level since November 2023, while its 30-year counterpart is on the cusp of hitting 5%. Those rising rates will in turn carry over to the cost of mortgages and loans of all sorts.

A big reason for all this is last week’s blowout jobs report, which left Wall Street wondering whether the Fed will continue its rate-cutting regime in 2025. Meanwhile, on the cusp of Donald Trump’s inauguration, there are fears the President-elect’s policies on tariffs, tax cuts, and mass deportations could prove inflationary. Whatever the case, a steepening yield curve is weighing on stocks, and some market watchers are eyeing bonds as a potential opportunity for investors.

Yields began their upswing off the back of strong monthly jobs data in October as recession fears eased. Two months later, the Federal Open Market Committee disappointed investors by signaling fewer cuts in 2025 than previously expected. As Bill Adams, chief economist at Comerica Bank, noted in a note on Monday, the minutes of the committee’s December meeting showed the Fed’s decision makers all agreed upside risk to inflation had increased.

Then came Friday’s jobs report. The Bureau of Labor Statistics revealed nonfarm payrolls grew by 256,000 in December, blowing away the expected number of 155,000. The strong labor data spooked investors now wondering whether the Fed will slash rates at all—or even reverse course and hike rates to fight rising prices.

Those fears have hit the stock market, leading the S&P 500 to sink 2.5% over the past five days. When unpacking the recent market volatility, however, long-term bond yields are the place to start, Ross Mayfield, an investment strategist at Baird Private Wealth Management, said in a note Friday.

Elevated borrowing costs—mortgage rates currently sit near 7% —burden broader economic activity, he noted. Higher interest rates also dent corporate profits and compress valuation multiples, he added, which weighs on stock prices.

“This is an unusual move following Fed rate cuts, but then again, so is the economic backdrop of the Fed cutting rates without a recession looming,” Mayfield said. “The move in yields likely reflects some combination of stronger-than-expected economic growth, fears of a second wave of inflation (potentially spurred on by changes to tariff and immigration policy), the lingering budget deficit/national debt issue, and a more hawkish Fed entering 2025.”

Could the bond sell-off present opportunity?

Ironically, the bond sell-off may be creating conditions for investors to jump back in to the fixed-income market. Stocks may appear more expensive to investors, for example, as the risk-free return that investors can obtain by holding U.S. government debt increases.

The Wall Street Journal’s Jon Sindreu recently argued that the surge in yields across the globe shouldn’t make investors worried about developed countries defaulting on their debt. “More important, inflation-linked Treasurys have sold off too,” he wrote, “belying the idea that markets see a hot economy and tariffs as a serious inflationary problem.”

Instead, he argued the jump in long-term yields makes sense as investors rule out the possibility of an economic downturn in the short run and demand a higher return for locking up their money for extended periods. That explains the increase in the term premium for assets like the 10- and 30-year Treasury, which compensates investors for the risk of interest rates changing over time.

Last week, Bank of America economists declared that the Fed’s rate-cutting cycle should be over. “Still, the bar for Fed hikes remains high,” BofA credit strategists Yuri Selinger, Jean-Tiago Hamm, and Sohyun Marie Lee wrote in a note Friday. “That puts a limit on how much higher rates can go, and how much more [investment grade] spreads could widen.”

Just don’t attempt to sell all this optimism to someone trying to buy a house.