Why Are Bond Yields Climbing?

Global debt rose for a fifth consecutive quarter in Q1 2026, increasing by more than $4.4 trillion to a record high of over $350 trillion, with the increase concentrated largely in the United States and China. – IIF – Institute of International Finance

Money was very cheap

Not that long ago, the price of money was close to zero. I vividly remember the day in June 2022 when my wife and I completed the purchase of our new home in Roskilde, Denmark. When contacting the mortgage bank, I was stunned to learn that it would actually send me a cheque every month. Interest rates were negative at the time. Even Danish mortgage rates were, and that has never happened to me before. As you can see in Exhibit 1, for a short period of time, the governments of Japan and Germany even enjoyed negative rates on 10-year government bonds.

Exhibit 1: 10-year government bond yields in various countries

Now fast forward to 2026, and take another look at the chart above. As you can see, much has since changed. 10-year govies yield 2.83% in Japan as these lines are written, 3.35% in Germany, 4.98% in USA and 5.28% in the UK. And households seeking a fixed mortgage or corporate borrowers looking for long-term working capital pay a great deal more than that.

If you wish to fix the loan for, say, 30 years, the cost is even higher, and I have noted that the Japanese government has to pay even more (3.90%) than the German (3.67%). Money is no longer cheap – not even in Japan. And, if anyone thinks that’s high, I remember conditions in the late 1970s and early 1980s, when I paid 18% interest on my first mortgage.

What is happening?

The U.S. military action in the Middle East is seen by many as the primary reason bond yields are suddenly so much higher. The war has admittedly led to significant energy supply problems because of the closure of the Strait of Hormuz, and this has indeed led to inflationary pressures, which have affected bond yields.

Having said that, the war in the Middle East is far from the whole story, and neither should you follow Trump and blame Ukraine for the high diesel prices. The real reason is multi-faceted. I can think of at least seven reasons why bond yields are on the rise – in no particular order:

• The war in the Middle East.
• Ukraine’s sustained attacks on Russian refining capacity.
• A sovereign debt feast.
• A higher term premium.
• Higher corporate borrowing needs, as the hyperscalers continue their massive capex spending programmes.
• The diminished hedge value of bonds (60/40 portfolios don’t work at present).
• A shortage of savings when compared to robust investments (when demand exceeds supply, the price goes up).

In my book, reason #3 above – the inclination amongst sovereigns to take on more and more debt – stands out as the primary reason why bond investors are getting cold feet.

As you know, the largest financial markets are in North America, Asia (Japan) and Europe. Now, look at Exhibit 2, and see where government debt-to-GDP is highest. 30 years ago, debt-to-GDP in Japan was 90%. It is now 200%. In the U.S., it was 65%. It is now 135%. Get my point?

Exhibit 2: Government debt-to-GDP by country

Further exploring the link between debt and bond yields

There is definitely a link between government debt and bond yields; however, it is not 1:1. The best example of that is Japan, the most indebted country in the world. What

makes Japan unusual is its virtual independence of foreign investors – virtually all Japanese government bonds are placed domestically. That is not the case in North America, nor in Europe.

If you compare Japan to Germany, you can see how that affects bond yields. As mentioned earlier, government debt-to-GDP in Japan is 200%, whereas in Germany it is 65%; however, despite the massive difference, bond yields are broadly the same (give or take). Therefore there, must be other reasons why bond yields differ from (DM) country to (DM) country. Less reliance on foreign investors cannot be the only reason. In no particular order, I can think of several reasons:

• diverging economic growth patterns;
• different inflation expectations;
• dissimilar savings ratios;
• varying investor confidence in the central banks in question;
• contrasting policy programmes in those central bank; and
• different credibility of the currencies in question.

How are higher rates likely to affect GDP growth?

GDP growth is quite obviously negatively affected by rising interest rates, and three GDP components are affected more than anything else:

1. Residential property:

Demand for residential housing cools when interest rates rise, mostly because mortgages become more expensive.

2. Discretionary consumer spending:

Discretionary consumer spending is affected by higher interest rates, mainly because credit-financed demand for durable goods, e.g. motor vehicles, falls.

3. Business investments:

Corporate investments slow when interest rates rise, as companies devote a larger share of revenues to servicing existing debt. This problem is amplified if/when existing debt must be refinanced at a higher rate.

Of those three, #1 has historically been the most important in percentage terms; however, #2 and #3 are both considerably bigger than #1 in terms of share of GDP, i.e. none of the three should be ignored. Furthermore, there is in fact a factor #4 as well. When bond yields rise, it becomes more expensive to service and/or to refinance existing debt. That component is particularly painful for Japan at present due to the country’s high debt levels.

Exhibit 3: Cum. % effect on GDP growth from a 100 bps rise in interest rates

The cumulative effect on the average OECD country is about -0.6% – i.e. a rise of 100 basis points in interest rates should slow OECD GDP growth by approx. 0.6%; however, as you can see in Exhibit 3, the variation from country to country is meaningful.

Final few words

Bond yields have risen more in the U.S. than elsewhere, and much of the reason for that can probably be explained by Exhibit 4 below. Government debt has indeed risen almost everywhere; however, in the U.S., unlike in most other countries, policy makers have, in recent years, allowed debt to grow (much) faster than GDP.

Exhibit 4: Government debt vs. GDP on USA

Now, after 10+ years of allowing that to happen, investors have started to bark, and the impact has been noticeable. The biggest question of them all is probably how that will affect the appetite for continued growth in capex spending amongst the U.S. hyperscalers as they, almost singlehandedly, drive the U.S. economy and the U.S. stock market at present. If only I knew the answer to that question…

Niels

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.