Worries about a protracted conflict with Iran, swelling fiscal deficits and rate hikes are rattling global bond markets. The potential effects on the U.S. economy stretch far beyond the Treasury market.

Treasury yields-the interest rates investors receive for holding U.S. debt-influence how much consumers and businesses pay to borrow money. Lenders use those yields as a benchmark for setting rates on mortgages and auto loans. They also undergird yields on the corporate bonds that companies use for funding.

That means the Treasury selloff risks pushing borrowing costs higher, making it even harder for Americans to afford homes and cars. If the selloff persists, that could start to affect a stock-market rally that has helped support consumer spending and the artificial-intelligence spending boom.

This comes as persistent inflation puts the Federal Reserve under pressure to raise rates for the first time since 2023-a move that would ripple through the economy by raising short-term borrowing costs.

Here's a look at how rising borrowing costs can affect the U.S. economy:

Housing fallout

Since mortgage rates are closely tied to the 10-year Treasury yield, the bond selloff is likely to deal another blow to a housing market hobbled by four years of high borrowing costs. Historically low inventory-the result of homeowners opting to stay put to preserve their lower mortgage rates-has also boosted asking prices.

"This is going to push mortgage rates much closer to 7%," said Mark Fleming, chief economist at First American. That "certainly will reduce affordability, particularly for the potential first-time home buyer," he said.

Mortgage rates briefly fell below 6% in February, sparking optimism about a potential rebound in home sales. But rates jumped after the U.S. and Israel attacked Iran, turning the market's key spring selling season into a bust. According to Freddie Mac, 30-year mortgage rates averaged 6.66% last week.

Higher bond yields also hit the rental market, making it costlier for developers to build and pushing landlords to demand higher rents. At the same time, a housing market frozen by high mortgage costs encourages renters who would like to buy to stay put, increasing demand.

There are also broader effects. Americans buy lots of stuff to outfit new homes, like furniture and appliances, and housing turnover also spurs renovation projects. The slowdown in such activity has already hit home-improvement retailers Home Depot and Lowe's.

Meanwhile, building-materials suppliers, such as roofing and flooring manufacturers, have struggled to make up lost business as homeowners opt to stay in their current homes.

Pricier rides

The Treasury selloff could also turn into bad news for car buyers, heightening the risk of higher interest rates for auto loans. Buying a car has become historically expensive, with pandemic-era supply-chain bottlenecks and tariffs driving up prices, while car maintenance and insurance costs have outpaced overall inflation. Car loans are closely tied to medium-term Treasury yields, such as on the five-year, which has reached its highest level since January 2025.

As interest rates rise, more buyers are taking on longer loans to afford monthly payments, and many car owners now owe more on auto loans than their car is worth.

At the same time, driving also remains expensive. Regular gasoline prices are averaging about $4.10 a gallon nationally, according to AAA, compared with $3.19 at this time last year.

Fed pressure

Inflation stuck above the Fed's 2% target-in July its preferred measure was 3.7%-has heightened the chances that the central bank will raise rates this year. Interest-rate futures imply the chances of a quarter-point rate hike at the September Fed meeting are close to 70%. By the end of the year, the chance of at least one rate increase is around 90%, while the chances of at least two is around 50%.

Higher rates would raise consumer borrowing costs on other kinds of debt, such as credit cards and home-equity lines of credit. Last week Fed Chairman Kevin Warsh indicated that the central bank may have more work to do to combat inflation.

Stock-market risk

The S&P 500 has risen nearly 20% over the past year, fueled in large part by enthusiasm for artificial intelligence. That has in turn boosted the net worth of people who own stocks-especially the very well-off-and made them more willing to spend.

But lofty stock prices are harder to maintain in the face of rising rates. That is partly because higher Treasury yields (which rise when prices decline) offer investors the opportunity to generate returns with much lower risk. Also, rising rates increase companies' borrowing costs, making it harder for them to fund operations and investment. Corporate-bond yields have risen sharply this year.

The rally in stocks is also helping fuel the AI investment boom, which has been a major source of support for the overall economy. On Tuesday, the Commerce Department reported that private construction spending on data centers came to an annualized $75 billion in July, up $51 billion from the end of 2023. Over that same period, private construction spending on everything else-houses, shopping centers, offices, etc.-fell by $120 billion.

This explanatory article may be periodically updated.