Bond yields hit multi-decade highs as the driver shifts from oil to fiscal fear

For most of 2026, investors could point to a clear culprit for rising bond yields: oil. The US war against Iran, disruptions to shipments through the Strait of Hormuz, and the inflation those shocks threatened had pushed yields steadily higher. Then, in mid-September, oil prices flattened out — and yields kept climbing anyway. That shift is what has Wall Street on edge.

US 10-year Treasury yields have now reached their highest level since 2002, trading above 5.3%, according to Barclays Private Bank. For the first time since 2002, the 30-year yield has climbed past 5.65%. In the UK, 30-year gilt yields hit 6%, their highest since 1998. And in France, the spread between 10-year French and German government bonds has blown out above 150 basis points — the widest since the European sovereign debt crisis of 2011.

According to the Financial Post, the global bond selloff has pushed the yield on the Bloomberg Global Aggregate Treasuries Total Return index to its loftiest point since 2000. Global bonds have lost 2.7% this year, even as equities gained 13%.

What changed in mid-September was not the economic data or central bank signals — it was the term premium. This is the extra compensation investors demand for the risk of locking money into a long-term bond rather than rolling over short-term securities. It is distinct from inflation expectations or rate forecasts, and because it cannot be directly observed — only inferred — Minneapolis Fed President Neel Kashkari once compared it to dark matter, according to Bloomberg reporting via Yahoo Finance.

There's multiple ways to calculate it, but they're all going higher. And what that tells me is that this move has staying power.— Frank Rybinski, Head of Macro Strategy, Aegon Asset Management

According to Yahoo Finance, the New York Fed's model puts the term premium at roughly 0.98% after a climb of around 40 basis points in recent weeks — its highest reading since 2014 and more than sufficient to explain the nearly 30-basis-point rise in 10-year Treasury yields over that period. A separate model that incorporates economists' forecasts for Fed policy has the term premium at 1.08%, the most since 2010.

The sharp repricing of term premium embedded in Treasuries — with 10-year term premium breaking out to a 12-year high — suggests investors are demanding greater compensation for holding duration amid mounting fiscal and geopolitical uncertainty.— Frank Monkam, Macro Markets Strategist

The term premium's rise is troubling precisely because it does not respond to the tools central banks normally use. Raising or cutting interest rates addresses inflation and growth expectations — the other components of a bond yield. But the term premium reflects something murkier: investors' unease about risks they cannot fully price, from geopolitical shocks to government debt loads that may prove unsustainable.

Capital Economics traces three distinct phases in the 2026 selloff. Early in the year, rising term premia coincided with growing fiscal concerns across advanced economies. From around July, yields tracked oil markets as Iran-related disruptions pushed energy prices higher and raised inflation expectations. Now, with oil prices stabilizing, term premia are rising again — and the explanation is less clear-cut in the US, though fiscal stress in Europe, particularly France, is a visible factor.

France has become the focal point in Europe. The French government recently acknowledged it will miss this year's deficit target, and this week presented a budget to parliament that relies on substantial spending cuts but would still leave the deficit at what Capital Economics describes as an unsustainable level — all against the backdrop of a stalled economy and fears of fiscal populism ahead of the 2027 presidential election. Barclays Private Bank notes the French-German bond spread has not been this wide since 2011.

In the US, there is no single obvious catalyst for the renewed term-premium rise. Among the factors cited by Barclays researchers led by Demi Hu are macroeconomic uncertainty, a breakdown in the typical relationship between stock and bond movements, growing debt supply, and concerns about government finances. Capital Economics' Neil Shearing has also flagged the possibility of technical factors, including portfolio rebalancing by large funds at the end of the third quarter.

It's not a simple story. But I would say that I think we are in a rising term-premium environment.— Stephen Douglass, Chief Economist, NISA Investment Advisors

Adding to the pressure is a structural shift in credit markets. According to Barclays, borrowing by the largest technology companies for AI-related purposes has jumped from just over $50 billion in 2022 to nearly $300 billion so far in 2026, with three months still remaining in the year. Spending on data centres, computing infrastructure and semiconductor capacity is on track to top $1.5 trillion next year — about three times last year's figure — adding further to the volume of bonds vying for investor dollars.

Japanese bond yields, which have climbed to their highest point since they were first issued in 1999, are piling on additional pressure. Higher domestic yields reduce the incentive for Japanese investors — historically large buyers of foreign bonds — to allocate capital abroad, according to Barclays Private Bank.

The bond market is no longer waiting for the Fed to tighten financial conditions. High term premia, inflation uncertainty and government borrowing needs can keep longer-dated yields restrictive even when the expected path of short rates becomes less aggressive.— Florian Ielpo, Head of Macro, Lombard Odier Investment Managers

One note of optimism came from Fed Bank of Dallas President Lorie Logan last week: because a higher term premium pushes up borrowing costs throughout the economy, it may itself cool growth and lessen the case for the Fed to raise rates further. According to Barclays, markets are currently pricing in roughly three additional 25-basis-point hikes by mid-2027, after Fed Chair Kevin Warsh signalled a change in tone by arguing that financial conditions cannot yet be considered restrictive. Capital Economics foresees only two more increases, bringing the target range to 4.25–4.50%.

For bond investors, the distinction matters enormously. If yields are high because markets are over-pricing rate hikes, that is a correctable error — and one that could eventually provide relief. But if yields are high because investors are demanding more compensation for the risk of holding government debt from countries with shaky fiscal foundations, that is a harder problem to solve. Capital Economics notes that while the US term premium has risen more than 200 basis points from its late-2020 low, it remains below its long-term historical average — meaning there is room for it to climb further.

Even if some key thresholds have been broken, we do not think long-term yields have necessarily reached a self-stabilizing level yet.— Gilles Moec, Chief Economist, AXA Group

According to the Financial Post, more than half of the 173 respondents to a Markets Pulse survey last week said they expect US 30-year yields to reach 6% before the year is out. Apollo Global Management's Torsten Slok is among those who believe rates could stay "higher for longer." As PBS notes, rising bond yields are one of the few forces strong enough to compel politicians to act, and they carry direct consequences for Americans' borrowing costs on everything from mortgages to car loans.

Capital Economics concludes that over the next 12 months, the greater threat to bond markets lies not in central-bank decisions but in fiscal worries and the prospect of a further increase in term premia — especially in the US, France, Italy and the UK — leaving the foundations of government bond markets, in the firm's words, "likely to remain shaky for some time."

Why it matters — Rising bond yields directly push up borrowing costs on mortgages, car loans and corporate debt, and when driven by fiscal fear rather than growth, they are harder for central banks to control — raising the risk of a prolonged squeeze on governments and households alike.

Sources differ on Number of additional Fed rate hikes expected over the next year: Roughly three additional 25bp hikes by mid-2027 (privatebank.barclays.com) vs At least three more 25bp hikes over the next year (market pricing); Capital Economics expects only two more, to a 4.25–4.50% target range (capitaleconomics.com)

Reported by capitaleconomics.com, en.macromicro.me, reuters.com, finance.yahoo.com, privatebank.barclays.com, financialpost.com, archive.is, pbs.org