The increase in US bond yields is driven by several factors: fading hopes of a US-Iran deal have kept oil prices elevated, fueling inflation; a strong US economy has led investors to expect further interest rate hikes from the central bank to control rising prices; and growing concerns about the sustainability of US public debt have made government bonds less attractive.
Central banks respond
In September, central banks in advanced economies: the Federal Reserve, the European Central Bank and the Bank of Japan raised policy rates, with the Fed doing so for the first time since 2023. However, doubts remain about whether monetary policy in major central banks can return inflation to target while the energy shock is driven by supply constraints and the Middle East conflict shows no sign of ending soon. How central banks explain their next moves will be critical for bond markets. The new Fed Chair’s initial communication was perceived as opaque by markets, leading to a strong jump in US long-term yields as markets feared that the central bank would not be able to control inflation. Advanced economies’ central bankers are now leaving no doubt that controlling inflation is their priority.
Governments remain in a spending spree
There are also no clear signs that governments intend to curb spending in the coming years. Reducing public spending would cool excess demand and ease inflationary pressure. Instead, the US administration remains firmly in expansion mode. The debt topped USD 40.2 tn or 123% of GDP in September 2026 and an example of the spending spree is President’s Trump promise to pay USD 5,000 to all American adults if Republicans win the midterm elections. The cost of this reward is more than USD 1tn. At the same time, governments fear soaring bond yields and high borrowing costs because of the effects on voters: reduced affordability due to higher credit card, car loan and mortgage rates, which typically rise with bond yields, can quickly erode political support.
AI-tech related investments inflationary
AI investment is also driving up bond yields through two main channels. First, continued spending on AI technology and the infrastructure needed to support it is adding just over 0.2 percentage points to inflation, with little sign of easing. Second, large technology companies, the hyperscalers are competing for funding in global bond markets. Their substantial borrowing needs are lifting government bond yields and prompting governments to issue shorter-term debt to avoid direct competition. With further corporate investment planned, these pressures are likely to persist.
Bond yields to remain under strain
We think the main drivers of the recent surge in government bond yields are likely to be temporary. High oil prices may ease if the war on Iran finds some sort of diplomatic solution in the near term. We expect major central banks to raise rates further, underscoring their commitment to price stability. At a certain level, higher yields should also cool down economic activity and demand for energy, reducing the upward pressure on inflation and on bond yields. However, there are forces that are more structural and harder to contain, including high public debt and government spending. Political debate has increasingly favoured fiscal expansion. IMF research covering 65 countries and more than 4,500 manifestos found that discourse supporting fiscal expansion has risen by 40% across advanced and emerging economies over the past three decades, while support for fiscal restraint has more than halved since its peak in the 1980s.
If fiscal expansion continues, central banks will be unable to lower and stabilise bond yields on their own. More structurally, upward pressure is likely to persist until governments accelerate the shift away from fossil fuels and reduce their economies’ exposure to chokepoints such as the Strait of Hormuz.