Why have bond yields risen and what does it mean for investors?

In recent months government bond yields have risen markedly across much of the developed world, with some reaching levels not seen for decades. The move has generated losses for existing bondholders, raised borrowing costs for governments and companies, and started to affect other asset classes.

In this month’s commentary, we look at what is driving the bond sell-off, and what it means for investors.

What has happened in the government bond market?

Put simply, investors are demanding a higher return for lending to governments, reflecting increased concerns about inflation, the public finances and the growing supply of debt coming to market. Since bond prices and yields move in opposite directions, this repricing has resulted in mark-to-market losses for existing bondholders.

Government bond yields have risen sharply across developed markets. The US 10-year Treasury yield is around 4.93%[1], close to its highest since 2023, while the 30-year yield has reached 5.38%[2], its highest since 2004. UK 30-year gilt yields have climbed to almost 6%, their highest since 1998[3]. Japan’s 10-year yield has risen to almost 3%, around its highest since 1996[4].

This matters because government bond yields provide a benchmark for borrowing costs and the valuation of other financial assets. Mortgage rates, corporate borrowing costs and the valuations of equities and other assets are all influenced, directly or indirectly, by government bond yields.

Moreover, the increase has been particularly pronounced at longer maturities. This suggests investors are not simply reassessing the path of central bank interest rates. They are also demanding more compensation for the uncertainty involved in lending money over the long term.

Why have bond yields risen?

There is no single explanation. Rather, there appear to be several factors that are combining to push up yields.

First, inflation has failed to come back to central bank target levels (generally around 2%), and the latest increase in energy prices associated with the conflict in the Middle East has added another inflationary shock. In turn, this has prompted markets to price in interest rate hikes from central banks, as they strive to contain price increases and inflation expectations.

Second, changes at the Federal Reserve (the Fed, the US central bank) may also have played a role in lifting yields. Since becoming Fed Chair, Kevin Warsh has sought to reduce the use of so-called “forward guidance”, arguing that policymakers should retain greater flexibility rather than signalling the likely path of interest rates. While this approach may enable policymakers to be more nimble in adapting policy to changed circumstances, it also leaves investors with less certainty about the future path of interest rates. Greater policy uncertainty can increase the term premium (the additional return required for holding a long-term bond rather than repeatedly investing in short-term securities) potentially contributing to the rise in long-term US yields.

Third, heavy borrowing by governments and companies has resulted in a surge in bond issuance, increasing the amount of debt that investors are being asked to absorb. The Organisation for Economic Co-operation and Development (OECD) estimates that governments and companies raised a record US$27 trillion from debt markets in 2025 and, in March, projected that gross borrowing would rise further to US$29 trillion this year[5].

There is a good chance that the actual figure for this year will be higher than US$29 trillion. Rising yields are increasing debt servicing costs, adding further pressure to government borrowing requirements. According to figures cited by the Financial Times, the rise in global bond yields since the start of the US-Iran war at the end of February has added US$16 billion to the cost of servicing the public debt of the G7 countries[6].

Ageing populations, defence expenditure and other spending commitments are also putting upward pressure on government spending. The International Monetary Fund estimates that global public debt rose to almost 94% of GDP last year and could reach 100% by 2029[7].

In addition, debt issuance to fund the Artificial Intelligence (AI) infrastructure build-out is also rising sharply. The enormous investment required for data centres, semiconductors and power infrastructure is increasingly being financed through bond markets. Alphabet, Amazon, Meta, Microsoft and Oracle (the so-called hyperscalers) have issued around US$220 billion of bonds so far this year, more than double their combined issuance during the whole of 2025[8]. Global corporate bond issuance has reached a record US$4.9 trillion so far this year, up 14% year-on-year[9].

In August, JPMorgan raised its forecast for tech sector debt issuance in 2026 to US$540 billion from US$450 billion previously, citing increased AI-related spending[10]. Looking further out, the bank reckons that AI-related capital expenditures will total US$5.5 trillion by 2030 and US$4.1 trillion of this will be funded by debt[11].

With governments now effectively competing for capital with companies, they may have to offer a higher yield to persuade investors to buy their bonds. Moreover, the increase in debt is coming to market at a time when some traditionally price-insensitive buyers of government bonds have stepped back from the market. Several central banks have moved from quantitative easing to quantitative tightening, reducing their bond holdings. Meanwhile, improved funding positions have reduced the need for many defined-benefit pension schemes to buy long-dated bonds.

As a result, a greater share of government debt must now be absorbed by more price-sensitive investors, who may require higher yields to persuade them to buy. This changing investor base may therefore be contributing to higher term premia and long-term bond yields.

What does the sell-off mean for investors in government bonds?

For an investor who already owns a government bond, rising yields are painful because they mean the price at which the bond can be sold in the market has fallen. Generally, the longer a bond’s maturity, the more sensitive its price is to changes in yields.

However, for new investors, higher yields are good news because buyers can purchase bonds at lower prices and lock in a higher prospective return if held to maturity. Higher starting yields also provide greater protection against modest further increases in interest rates because the higher income received can offset some of the resulting capital loss.

Higher yields may also make government bonds more useful as portfolio diversifiers. With yields now starting from higher levels, bonds have greater potential to generate positive returns if economic growth weakens and central banks cut interest rates. Similarly, higher starting yields might make government bonds a more effective portfolio diversifier in the event of equity market losses during risk-off periods.

However, it should be noted that the diversification benefit of bonds is less reliable when inflation is the main source of market stress, as this can push bond yields higher at the same time as equity prices fall. This was the case in 2022, when bond yields jumped from historically low levels, and the prices of both bonds and equities dropped sharply in response to the post-pandemic inflation surge. More generally, government bonds have proved a less effective portfolio diversifier since the pandemic than investors had previously come to expect given lingering concerns about inflation.

What does it mean for corporate bonds?

Corporate bond yields consist broadly of two components: the underlying government bond yield plus a credit spread, which compensates investors for taking additional risks, including the possibility that a company fails to repay its debts.

Consequently, even if credit spreads remain unchanged, rising government bond yields increase the overall yield on corporate bonds. Like government bonds, a rise in yield results in a mark-to-market capital loss for existing investors, but offers higher prospective returns for new investors.

For companies issuing bonds, higher overall yields raise the cost of issuing debt. This is generally less problematic for investment-grade firms, but can pose significant risks for lower-quality borrowers in the high-yield market, particularly when maturing debt has to be refinanced at significantly higher rates.

For highly leveraged borrowers, the resulting increase in interest costs may raise concerns about their ability to service their debts, which could ultimately result in default. Investors may therefore demand an additional risk premium, or wider credit spread, to hold their bonds. This pressure has become evident among CCC-rated US companies (bond credit rating represents the creditworthiness of a company), where credit spreads have widened to 10.64 percentage points[12]- their highest since April 2025 - in response to rising default risks.

What does the rise in yields mean for equity investors?

Higher bond yields create several potential headwinds for equities.

The first is valuation. A share represents a claim on future corporate profits, and those future cash flows are worth less today when discounted using a higher interest rate. The effect tends to be greatest for highly valued growth companies, where a large proportion of the expected profits lie far into the future.

Second, rising yields mean bonds become relatively more attractive compared to equities. When government bonds yielded less than 3%, investors had a strong incentive to move into equities in search of returns. A world in which relatively safe bonds yield around 5% changes that calculation.

Third, higher yields increase companies' financing costs. Businesses refinancing debt at higher interest rates have less money available for investment, dividends and share buybacks. Higher mortgage and other borrowing costs can also eventually slow economic activity, which in turn could hit corporate profits.

That said, rising bond yields are not automatically bad for equities. The reason for the increase matters. If yields rise because economic growth is stronger than expected, higher corporate earnings can offset the impact of a higher discount rate. Equities can therefore perform well alongside gradually rising yields.

So far, equities have proved relatively resilient. Global equity valuations, as measured by the forward price/earnings ratio of the MSCI All-Country World Index (ACWI), have fallen over the past 12 months, partly reflecting the rise in bond yields[13]. However, global equity markets remain close to record highs, supported by strong corporate earnings and continued upward revisions to profit expectations, mainly in the tech sector[14].

Nevertheless, US yields are getting close to levels that could start to have a more negative impact on valuation, and a disorderly rise could dent investor sentiment. Research from JPMorgan suggests that, historically, once the US 10-year yield rises above 5.5%, higher yields can result in sharper falls in S&P 500 price-earnings multiples[15].

Ultimately, higher bond yields are not necessarily bad news for investors. While the adjustment has created losses and increased borrowing costs, higher starting yields should improve prospective returns from bonds. The bigger risk is that yields continue to rise rapidly: at some point, higher borrowing costs and pressure on asset valuations could become a more significant headwind for both the economy and financial markets.

11 September 2026

[1]https://tradingeconomics.com/united-states/government-bond-yield

[2] https://uk.finance.yahoo.com/quote/%5ETYX/

[3] https://www.reuters.com/world/uk/uk-10-year-gilt-yield-hits-new-19-year-high-2026-09-10/

[4] https://www.bloomberg.com/news/articles/2026-09-01/japan-s-10-year-bond-yield-hits-3-for-first-time-since-1996-mti4e8ui

[5] https://www.oecd.org/en/about/news/press-releases/2026/03/with-pressures-rising-in-global-debt-markets-maintaining-resilience-will-require-sound-public-finances-strong-institutions-and-policies-that-support-growth-and-innovation.html

[6] https://www.ft.com/content/bbe90db5-64ac-441d-87e4-e984c5ef8629?syn-25a6b1a6=1

[7] https://www.imf.org/en/publications/fm/issues/2026/04/15/fiscal-monitor-april-2026

[8] https://www.reuters.com/business/finance/whats-behind-selloff-world-bond-markets-2026-09-01/

[9] https://www.reuters.com/business/finance/whats-behind-selloff-world-bond-markets-2026-09-01/

[10] https://www.bloomberg.com/news/articles/2026-08-07/jpmorgan-boosts-tech-bond-sales-outlook-as-ai-debt-binge-expands?srnd=undefined

[11] https://finance.yahoo.com/technology/ai/articles/bubble-jpmorgan-says-5-5-094757864.html