Bond Yield Battle

From the CIO's Desk

Interest rates have moved higher in 2026 as investors have reassessed the outlook for economic growth, inflation, and Federal Reserve policy. Earlier in the year, markets anticipated at least two rate cuts from the Federal Reserve. Today that view has flipped, with investors contemplating the possibility that the Fed may raise rates a couple of times over the next year. This shift in expectations has led to rising bond yields, with the 10-year Treasury now at the high end of our 4.25%-4.75% target range. 

This shift in Fed expectations and the corresponding higher movement in bond yields reflects a combination of resilient economic activity, persistent inflation, large fiscal deficits, geopolitical uncertainty, and higher bond supply from both the government and corporations. 

Longer-term rates are also being influenced by forces beyond the immediate economic cycle. Federal debt has surpassed $40 trillion, and the deficit remains unusually large, requiring continued Treasury issuance. At the same time, significant AI-related capital spending is driving substantial corporate borrowing, creating another source of fixed-income supply competing for investor capital. Overseas bond yields have also become more competitive, offering a competing alternative for investor capital. Most noteworthy may be Japanese government bonds, which now offer more attractive returns to Japanese investors than U.S. Treasurys (currency hedged), potentially reducing an important source of Treasury demand. These factors, combined with the Federal Reserve's shift toward less transparent communication, have contributed to the rise in longer-term bond yields during 2026. 

Importantly, the move higher in interest rates is not solely a U.S. phenomenon, with government bond yields in other major economies rising in a comparable manner as U.S. Treasuries. Figure 1 below compares the year-to-date change in 10-year government bond yields across several major global economies.

As we put this year’s rise in interest rates into perspective, it's worth noting that the yield on a 10-year Treasury bond was at or near current levels in early 2025, during the spring of 2024, and in the fall of 2023. The chart in Figure 2 below highlights this. While there is much discussion in the press about elevated bond yields, a look at recent history suggests that bonds remain within the prevailing trend and are aligned with our target range. 

Conclusion

We view this year’s rise in bond yields as justified and supported by evolving economic conditions and shifts in the bond market. As we look ahead, our return expectations for the fixed income asset class have increased given current interest rate levels. Moreover, bonds may offer a more attractive risk profile going forward, given that higher starting yields provide more income and a greater cushion against further rate increases. With economic growth beginning to moderate, inflation showing signs of tempering, and high-quality bond yields at more compelling levels, we view fixed income as offering an attractive balance of income, downside protection, and potential total return. 

Disclosures:

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