Bond yields have risen significantly in recent months as investors adjust to a changing economic environment.
Larger government deficits, increased borrowing requirements, stronger competition for capital and persistent inflation concerns have all contributed to upward pressure on longer-term bond yields.
The move has created some short-term volatility in bond markets. However, we do not believe the recent rise in yields is a reason for investors to panic. In many respects, markets are simply adjusting to a world that looks very different from the ultra-low interest-rate environment that followed the Global Financial Crisis.
What is happening with bond yields?
The most noticeable move has been in longer-dated government bonds.
Put simply, investors are demanding greater compensation for lending money to governments for 20 or 30 years. This reflects a combination of concerns about inflation, government borrowing and the amount of debt that governments will need to issue over the coming years.
Importantly, this is not an isolated development in one country. Long-term bond yields have been rising across major developed markets.
In the US, the 30-year Treasury yield briefly reached 5.34%, its highest level since 2007. European bond markets have experienced similar pressure, with German and French yields reaching their highest levels since 2008. In the UK, 30-year gilt yields rose to around 5.9%, close to their highest level since 1998.
Governments are borrowing more
One of the key drivers behind higher yields is the sheer amount of government debt being issued.
The US, UK, France and Japan all have government debt levels around or above 100% of GDP, while continuing to run substantial fiscal deficits.
The US national debt has now surpassed $40 trillion and continues to rise by almost $6 billion per day.
When governments need to issue more bonds, they are effectively competing for investors’ capital. If the supply of bonds increases significantly, investors can demand a higher yield before committing their money.
This is a relatively straightforward example of supply and demand: more borrowing can mean governments have to offer investors a greater return to attract capital.
Governments are not the only ones looking for capital
There is another important source of demand for capital: companies.
Technology companies are raising substantial amounts of debt to help finance the rapid expansion of artificial intelligence infrastructure and data centres. According to Morgan Stanley, global AI-related debt issuance could exceed $570 billion by the end of 2026.
This creates additional competition for investors’ money.
Governments and large corporations are effectively approaching the same pool of global capital. Investors therefore have more opportunities to choose from and can demand more attractive returns before committing their capital for the long term.
Inflation remains a concern
Inflation is another factor influencing long-term bond yields.
Although inflation has fallen substantially from its peak, investors remain conscious that it may prove more persistent than previously expected.
Recent increases in energy prices have added to those concerns. Tensions around the Strait of Hormuz pushed Brent crude above $93 a barrel, raising the possibility that higher energy costs could feed back into inflation.
If inflation remains higher for longer, central banks may have less scope to reduce interest rates as quickly as markets had previously anticipated.
This is particularly relevant for longer-term bonds, because investors need to consider what their money will be worth in real terms over the next 20 or 30 years.
Should investors be worried?
The rise in bond yields is certainly something investors should pay attention to. But we do not believe it is a reason to panic.
Financial markets are adjusting to a different economic backdrop — one characterised by higher government borrowing, larger fiscal deficits, greater competition for capital and the possibility of structurally higher inflation.
That adjustment can create volatility, but volatility itself does not mean that an economic crisis is developing.
It is also worth putting today’s yields into historical perspective.
For much of the period following the Global Financial Crisis, interest rates and bond yields were exceptionally low. Central banks kept rates close to zero, while quantitative easing helped suppress yields across developed bond markets.
From a longer-term historical perspective, those ultra-low yields were arguably the unusual period rather than the current environment.
For investors who have become accustomed to extremely low bond yields, today’s rates can therefore look high. But in a broader historical context, they are far less extraordinary.
Higher yields can create opportunities
There is an important distinction between what happens to bonds today and what higher yields can mean for bond investors over time.
When bond yields rise, the prices of existing bonds generally fall. As a result, bond funds can experience a decline in value when yields move sharply higher.
However, higher yields also mean that newly purchased bonds offer more attractive income.
Over time, as bonds within a fund mature and are replaced with bonds offering higher yields, the fund’s overall return potential can improve.
This is why rising yields are not necessarily bad news for a long-term bond investor.
In fact, for investors with a sufficiently long investment horizon, higher starting yields can ultimately be beneficial, because they provide a more attractive level of income and a potentially stronger foundation for future returns.
How are we positioned?
Our client portfolios maintain a diversified allocation to global bonds because of the important role they play within a broader investment strategy.
Bonds can provide income, diversification and a degree of stability alongside equities and other growth assets. Their role becomes particularly important when constructing portfolios designed to withstand different market and economic environments.
From a tactical perspective, most of our investment providers currently favour UK and European government bonds over US Treasuries.
This positioning reflects their assessment of relative valuations and the risks associated with government borrowing, inflation and interest rates across the major developed markets.
The bigger picture
The recent rise in bond yields is a reminder that investors need to look beyond short-term market movements.
The investment environment of the past 15 years — characterised by exceptionally low interest rates and unusually low bond yields — is unlikely to be repeated indefinitely.
Higher government borrowing, changing inflation dynamics and increased demand for capital may mean that investors need to become accustomed to a world in which interest rates and bond yields are structurally higher than they were during the post-financial-crisis period.
That does not necessarily represent a problem.
For long-term investors, higher bond yields can ultimately mean better income and improved return potential. The key is to maintain appropriate diversification, understand the role bonds play within the overall portfolio and avoid making short-term investment decisions in response to market volatility.
Sources
Bloomberg, 25 August 2026
US Congress Joint Economic Committee, FY2025 Debt Increased by $2.2 Trillion, Stands at Over $37.6 Trillion
Morgan Stanley, 2026
