Last week, U.S. Treasury yields hit levels not seen since the onset of the Great Recession, prompting fears about ramifications for markets and housing.

Speculation about the Fed’s next move may have contributed to the recent spike, but experts say the underlying reason is more nuanced.

According to Pimco economist Tiffany Wilding and portfolio manager Mike Cudzil, the increase “is driven by reduced expectations of recession, which counterintuitively could lead to an increase in the supply of government bonds in the future."

"As a result, investors are demanding a higher premium for holding longer-maturity bonds,” she added.

Benchmark 10-year Treasury notes reached a yield of 4.887%, and 30-year yields hit 5.053%—both the highest since 2007, just before the Great Recess

Whatever the reason, the 10-year yield is up more than 75 basis points since mid-July—and this has major implications for investors and homebuyers.

Markets: reactions and implications

Gennadiy Goldberg, the head of U.S. rates strategy at TD Securities, commented: “What this [the rise in bond yields] does is continue to increase the fears that higher interest rates are going to slow the economy."

Higher yields can also affect various investments.

For example, bond prices move inversely to yields, so rising yields can lead to losses for investors holding bonds with lower coupon rates. As a result, investors may opt for shorter-duration bonds or diversify into other fixed-income assets.

The stock market isn't off the hook either because higher interest rates can increase borrowing costs for businesses and take a bite out of their bottom lines.

Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, said: “Companies that issued debt to raise capital when interest rates were low may start to see those issues reach maturity. That could require them to refinance debt at today’s higher interest rates as existing debt comes due.”

On a more technical level, higher yields also make bonds more attractive relative to stocks, leading to a shift in allocations.

“If interest rates move higher, stock investors become more reluctant to bid up stock prices because the value of future earnings looks less attractive versus bonds that pay more competitive yields today,” said Haworth.

One of the biggest dominoes to fall: housing

The surge in the 10-year Treasury yield has broader implications for the housing market, which is a major driver of the economy.

Higher mortgage rates can cool down the housing market by reducing affordability, potentially leading to a slowdown in home sales and construction.

In a letter sent on Oct. 9 to the Federal Reserve Board of Governors and Chair Jerome Powell, major organizations within the housing industry expressed concerns about the impact of monetary policy on the already-struggling real estate market.

“The speed and magnitude of these rate increases, and resulting dislocation in our industry, is painful and unprecedented in the absence of larger economic turmoil,” the letter said.

The average 30-year mortgage rate currently hovers just below 7.5%, as reported by Freddie Mac.

Simultaneously, the average home price has surged to $407,100, while the available housing inventory is equivalent to only 3.3 months of demand.

The National Association of Realtors estimates that housing inventory would need to double to alleviate the upward pressure on home prices.