Treasury yields just hit a 16-year high—here's why it matters to you

Yields on long-term U.S. government bonds are trading like it's 2007 again as investors concede that the Fed's inflation battle will take longer than expected.

The yield on the 10-year U.S. Treasury note — basically the interest rates the government pays for borrowing money — peaked at 4.382% on Aug. 17.

The last time it was this high was at the start of 2007, just before the mortgage-backed security market began unraveling.

While a 4.3% interest payment for the 10-year sounds attractive, yields are rising because investors are dumping bonds — yields rise as bond prices fall and vice versa.

This is a bit of an anomaly in the post-financial crisis world where anything above 4% for the 10-year was considered a strong buy.

Most people don't usually think about Treasuries. But whether you hold government bonds or not, this anomaly will affect everyone.

Why are yields rising?

The short answer: The Fed.

The slightly longer and more complicated answer: Investors are no longer confident that interest rates are going lower anytime soon.

Pundits have been calling for the great "pivot" — a time when the Fed signals it's no longer going to raise interest rates. But that hasn't happened.

That's, in part, because the economy is in surprisingly good shape, and inflation remains stubbornly high.

The Fed's policy committee meets eight times each year to set interest rates. It also releases the "minutes" of each meeting to provide transparency about why it did what it did.

According to the minutes of the Fed's July meeting, which were released on Aug. 16, officials "continued to see significant upside risks to inflation," which could require even higher interest rates.

Short-term rates set by the Fed are currently between 5.25%-5.5%, the highest in 22 years. But they are expected to go higher very soon.

Higher borrowing costs are coming

You may have noticed there's still a big gap between the 10-year yield and the Fed's short-term interest rate. But analysts warn that the gap could narrow as investors keep selling bonds.

How will the sharp rise in yields affect borrowers?

For one, fixed-rate mortgages are tied to the 10-year Treasury yield.

Whether they go up or down, fixed-rate mortgage rates typically follow. Thirty-year mortgages are already north of 7%. How much higher can they go before the dream of homeownership completely evaporates?

The same goes for car loans, credit card interest rates, and student debt—all moved by the Treasury market.