Why long-term bond yields are rising

Yields for long-term bonds are high right now, but it’s not just the US experiencing this phenomenon. Yields are high for bonds in many parts of the world, which pushes up interest rates for consumer and business borrowers.

In the US, the 10-year Treasury closed at 5.28% on Oct. 2, and hit 5.34% on Oct. 5—the highest level it has reached since 2002.

The UK’s 10-year Gilt yield hovered at 5.38% on October 6, down from 5.4% a day before. And Japan’s 10-year government bond stood at 3.1% on Tuesday, its highest level since 1996.

“Long-term bond yields have risen sharply around the world, both compared with pre-pandemic levels and since the Iran conflict began,” Citigroup said in a Sept. 25 global markets and economy report. The investment bank noted that, in several countries, 10-year bond yields have jumped by 60 to 100 basis points since February.

Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, told CFO Brew that the hike in bond yields “is not just happening in the US. It’s definitely happening around the globe, particularly [in] other developed markets.”

Foundation. A bond yield refers to the return an investor demands for loaning the government or any bond-issuing entity money. The US’s 10-year Treasury yield serves as a benchmark that lenders use to price many other loans, including mortgage rates and auto loans, Pappalardo said. “As the 10-year Treasury yield has been increasing, so has the interest rate on things like home mortgages and auto loans,” he added.

Higher bond yields can impact CFOs’ capital spending needs also, according to Pappalardo. For CFOs that need capital for a “big project,” like an acquisition or a spending program, high yields can hurt. “Unfortunately, their borrowing costs are going up and up and up,” he said.

But if “a CFO has a surplus on their balance sheet and can deploy excess cash or capital into these markets, they can produce a pretty nice return for their company.”

Drivers. What’s causing the high bond yields? “Inflation is one of, if not the main, factor that’s pushing bond yields higher,” Pappalardo said.

“The main driver is the upward inflation pressure, and the inflation pressure is a result of the higher energy and oil prices that we’re experiencing around the globe, mostly driven by the conflict in the Middle East and the supply disruptions for oil that that conflict has caused,” he said.

Citi agreed, saying it expects “global headline inflation to reach 3.5% this year, nearly a full percentage point above what we expected at the start of the year. This increase has been driven primarily by energy costs.”

The International Monetary Fund’s global inflation forecast released in July was 4.7%. “Put simply, the disinflation trend that has been in place since early 2024 has stalled,” Petya Koeva Brooks, deputy director of the IMF research department, said at a July World Economic Outlook press conference.

So much debt. Other issues are helping drive up bond yields. For one, “government borrowing requirements continue to rise,” Citi said. In August, the US gross national debt reached $40 trillion, which Pappalardo called “a very large and concerning number.” Citi expects US “fiscal deficits to average around 6% of gross domestic product over the coming decade, resulting in nearly $25 trillion of additional debt issuance.”

“As the debt load increases, investors will require more compensation to buy that debt in the form of higher yields because it’s becoming inherently more risky,” Pappalardo said.

AI investment is also contributing to the rise, because it’s “increasingly being financed through long-term credit markets,” Citi said. “We estimate that US AI investment reached nearly $300 billion last year and accelerated further during the first half of this year, averaging $466 billion.” “In 2026, a lot of tech companies have borrowed money to make those AI investments, whether that was through loans from a bank or private credit or just issuing more corporate bonds,” Pappalardo said. 

All the AI debt “pushes all interest rates higher,” he explained. “It’s a relatively simple supply and demand equation. There’s more supply of debt coming into the market, whether that’s from governments or tech companies funding AI investments…Somebody has to purchase that debt.”

“The next incremental buyer very naturally will require a higher income stream or higher yield from their investment to continue to make those investments,” Pappalardo said.