Investors observe rising US government bond yields in United States; 30-year yield highest since 2007

Investors observe rising US government bond yields in United States; 30-year yield highest since 2007

Bond markets: why are government bond yields rising – and what does it mean for investors?

Why are government bond yields rising – and what does it mean for investors?

Bond yields rose in the first half of the year as the Iran war sparked concern about inflation and higher interest rates. Yet even as these fears eased, yields have continued to rise as governments and companies compete for capital.

The expression poacher turned gamekeeper comes to mind when considering the key figures in US economic policymaking. Scott Bessent, the Treasury Secretary, made his name at a hedge fund that specialised in trading government bonds and currencies. Kevin Warsh, Chair of the Federal Reserve, spent time as a partner at a closely related fund. Yet even with all their experience, they have found themselves wrestling with a challenge confronting policymakers around the world: rising borrowing costs.

Government bonds have come under pressure this year, pushing yields higher. The bond market story has been one of two halves.

The first half of the year was dominated by the Iran war. Higher energy prices fueled concerns about inflation and the need for higher interest rates. At the start of 2026, investors had expected the Federal Reserve to continue easing policy. As inflation fears intensified, they started to price in the possibility that interest rates might rise. This shift was most apparent in shorter-dated bond yields, which are most heavily influenced by expectations for central bank policy.

Since the mid-point of the year, the picture has changed. While tensions in the Middle East have eased slightly, and inflation expectations cooled, longer-dated government bond yields have continued to rise. This is not just a US story: a similar trend has been seen in the UK, Eurozone and Japan.

We saw a brief return to the dynamics of the first half after the Jackson Hole central banking symposium in late August. Investors interpreted Chair Kevin Warsh’s remarks that there was still “work to do” on inflation as a signal that interest rates may rise in the near term. However, the longest-dated yields fell, suggesting that markets were reassured by the Fed’s commitment to bringing inflation back to target.

US bond yields are on the rise

The 30-year yield is now at the highest level since 2007 (%)

Source: LSEG Workspace, 1st September 2026

Why are long-dated yields still rising?

The reasons behind the moves in the second half of the year are harder to disentangle than in the first.

Some investors put it down to anxiety over public debt. Net US public debt is approaching 100% of GDP and deficits remain very high. 1 Yet US public finances, and those of many European countries and Japan, have been on an unsustainable path for years. Why should markets suddenly be concerned now?

One possible explanation is the growing competition for capital. Governments are borrowing ever more to fund defence and welfare spending, just as companies are raising unprecedented sums to invest in artificial intelligence infrastructure. AI-related capital expenditure is expected to exceed $1.75 trillion in 2026 and 2027 2 . A significant proportion will have to be financed in bond markets.

There are other factors that may also be contributing to higher yields. President Trump’s frequent criticism of the Federal Reserve has given investors reason to question whether the world’s most influential central bank will remain fully independent. They may be demanding higher yields as compensation. It is also possible that markets are anticipating stronger long-term growth and a higher level of interest rates over time.

International markets are all impacted by developments in the US, which is still by far the world’s largest bond market. However, the fact that yields are rising across the UK, Eurozone and Japan suggests the explanation is probably broader than US-specific factors alone.

Not just a US phenomenon

Long-dated bond yields around the world (%)

What does it mean for equity markets?

Many commentators have been surprised by the resilience of equities in the face of higher government bond yields. Higher yields make borrowing more expensive for households, companies and governments, with knock-on consequences for growth.

This is a genuine headwind. In today’s economy, however, it is being offset by more supportive factors. Corporate and household balance sheets are in good shape, helping to insulate them from higher borrowing costs. This was the experience of 2022, when a steep rise in rates had much less impact on the US economy than many feared. We are also seeing corporate profits growing at the fastest pace in many years, driven in part by the AI infrastructure build-out. Investors remain optimistic that the technology will boost productivity and support longer-term earnings growth.

If bond yields do continue to rise, much will depend on how. A gradual increase, accompanied by continued economic growth and strong earnings, need not derail equity markets. A sudden or disorderly rise could be more problematic.

This year’s moves in bond markets have taken long-dated yields to levels not seen in well over a decade. On its own, this would attract investor attention. What makes the latest moves more striking is signs that policymakers are becoming concerned, especially in the US.

The first indication came when the US Treasury jointly intervened with the Japanese authorities to defend the yen. It has been widely suggested that this was done to reduce Japan’s incentive to sell US bonds. Later in the month, the US Treasury announced that it would increase the scale of the buyback operations it occasionally conducts in long-dated bond markets to support liquidity.

These measures are relatively small in the context of the vast US Treasury market. Their significance lies more in what they signal: policymakers are focused on rising borrowing costs and are prepared to intervene to keep yields under control.

Elsewhere, the response has been less direct. In Japan, policymakers have attempted to combat inflation by supporting the yen, while avoiding the more painful medicine of raising interest rates. In the UK, the focus has been on fiscal measures to keep deficits under control.

While circumstances differ between countries, the common theme is that policymakers are acknowledging the increase in borrowing costs. It remains to be seen whether they will manage to address underlying fiscal pressures in response.

We are not currently looking to increase our overall bond allocation, given our view that other markets offer more attractive opportunities. However, we believe current yield levels should provide support for bond investors.

Importantly, bond yields now offer a meaningful return after adjusting for inflation. This has not always been the case over the past two decades. At a time when some investors are concerned about over-exuberance in equity markets, a real return in bond markets is appealing.

The “yield curve” is also more supportive than it has been for some time. When longer-dated bonds yield more than shorter-dated bonds, investors are compensated for taking on the risk of a longer-term investment, which should help support demand for longer-dated bonds.

Finally, politicians appear increasingly aware that bond markets cannot be ignored indefinitely. That does not guarantee lower yields from current levels, but it may encourage greater fiscal discipline.

The era of near-zero interest rates appears firmly behind us. Investors are now adjusting to a world where competition for capital is greater, borrowing is more expensive and long-term yields settle at higher levels than many became accustomed to over the past two decades.

1 Source: Federal Reserve Bank of St. Louis. Federal debt held by the public as a percent of GDP was 98.7% as at the end of the first quarter of 2026. The federal government had a budget deficit of 5.8% of GDP in 2025.

2 Source: Goldman Sachs, Expectations for Hyperscaler Debt Issuance: A Top-Down Approach, 27 th July 2026

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