The U.S. bond market just had one of its worst days in more than a year. The yield on the 10-year Treasury note shot up 0.15 percentage point to 5.11%, its highest level since 2007.

The upshot will be higher borrowing costs throughout the economy if yields don't return to their previous levels. And since bond prices drop when yields rise, anybody that owns Treasuries and other bonds will share in the pain.

Mortgage rates already are heading toward 7%, or even higher, threatening to depress an already weak housing market in many parts of the country.

What happens in coming days isn't clear. Rising energy prices could continue to push Treasury yields up, but interest-rate movements are notoriously hard to predict.

Several factors contributed to the brutal Wednesday selloff.

There was higher-than-expected reading from a September manufacturing purchasing managers survey released earlier Wednesday, which indicates a hotter industrial economy. Oil prices moved higher as benchmark U.S. crude gained almost $2 a barrel to $92.50.

What else depressed bonds? There was weaker-than-expected demand for the Treasury's five-year note auction Wednesday. Federal Reserve Gov. Michael Barr said Wednesday that more rate increases are needed to bring inflation down to the Fed's 2% target. The odds of quarter-percentage-point rate hike by the Fed at its October meeting have risen sharply to almost 70% now, up from 48% a week ago and under 10% a month ago.

There also was defiant talk from Iran's president, Masoud Pezeshkian, at the United Nations, saying his country wouldn't give up its civilian nuclear program.

The bond selloff negatively affected stocks because higher rates-including mortgage rates-are a negative for the economy and make fixed-income investments more appealing relative to equities.

The view on Wall Street was that a move above 5% on the 10-year Treasury would be a psychological negative for stocks and that happened Wednesday.

The S&P 500 index declined 0.8% while the Dow Jones Industrial Average fell 0.7% and the technology-heavy Nasdaq dropped 1.1%. Interest-rate sensitive sectors, not surprisingly, were the worst performers, including utilities, real estate and consumer discretionary stocks.

The State Street Utilities Select SPDR ETF dropped 2% Wednesday after hitting a new 52-week low while the Vanguard Real Estate ETF also was down 2%.

"Today's bond selloff is really the market adjusting to a higher hurdle rate. The latest data showed an economy that is not just holding up, but accelerating, while inflation pressures are moving higher at the same time. Add elevated energy prices to that mix, and investors have to reconsider how restrictive monetary policy needs to be and for how long," says Andrew Davis, head of investment strategy at Bryn Mawr Trust.

"The important point is that this isn't simply a growth story or an inflation story, it's the combination. Stronger growth gives the economy more capacity to absorb higher rates, while persistent inflation gives the Fed less room to provide relief. That's a difficult combination for bonds," Davis adds.

The upward move in Treasury yield spilled over into the municipal bond and other parts of the fixed-income markets including corporate bonds and mortgage securities. The iShares Core Aggregate Bond ETF dropped 0.8% and the iShares MBS ETF was down 1%.

The yield on Triple-A munis rose less than a tenth of a point Wednesday to 4.96%-less than the yield increase on Treasuries - as long-term munis may be benefiting from strong retail investor demand with yields around or above 5% depending on credit quality. Thirty-year Single-A and double-A munis now yield over 5%-equivalent to about 10% on fully taxable bonds for residents in high-tax states like New York and California.

There were some other predictable moves keyed off the rate rise Wednesday. Gold prices were down almost 2% to $4,285 an ounce since higher rates and inflation-adjusted yields tend to depress precious metals.

And the dollar normally is supported by high U.S. rates since that makes holding dollars more appealing. The dollar gained about 0.5% Wednesday against a broad measure of foreign currencies.

In the energy market, diesel fuel prices continue to rise, hitting $6.50 a gallon, up $1 a gallon this month alone. This prompting frantic efforts by Republicans to bring them down, including a proposal to limit exports of diesel fuels.