MACRO EXPLAINER: The global bond sell-off, Part II
Why yields are rising, why it matters, and what investors can do about it
As the global sell-off in bonds has intensified in the last six weeks we have updated our Macro Explainer: The Global Bond Sell-off from 21st August 2026.
What?
Global bond yields have been rising for months but the rise has accelerated in the last few weeks.
US 10-year yields have breached the psychologically important 5.0% level and are now at the highest level since 2002. US 10-year yields rose by 53bp in September alone. Rising yields mean falling bond prices. TLT, the long-dated US Treasury ETF, was down 5.75% in September.
We are seeing a similar pattern of rising yields/falling bond prices in Europe and Japan.
Why?
There is a range of factors driving higher yields. At a basic level, bond yields are the cost of borrowing, and the cost of borrowing is driven by the supply of and demand for funds.
The demand for capital has been growing as governments around the world have been running deficits (to fund infrastructure, defence and other projects) while there has been a huge increase in capital demand to fund AI capex.
The large tech companies (the hyperscalers) are expected to spend just under $800bn on AI capex this year. That’s more than the US will spend on residential housing investment.
Another way to think about bond yields is that over time they tend to track the growth in the economy (as measured by nominal GDP). Inflation levels around the world are generally higher now than in the last decade, and growth has been resilient, so nominal GDP has been stronger.
Bond yields were also artificially depressed by central bank buying of bonds in the 2010s and early 2020s (for quantitative easing) but that source of demand is now gone.
Why Has the Rise in Yields Accelerated?
The factors above are structural factors contributing to higher baseline yields but the most significant driving factor, in the last few weeks, is the market’s reassessment of the outlook for economic growth and for interest rates.
US 2-year yields, which reflect where the market thinks short-term rates in the US will average over the next 2 years, have risen by just under 1 percentage point from just above 4.0% to just under 5% since mid-August.
Official US rates are 3.85% so the market is effectively pricing that economic growth is so strong that interest rates will have to rise by about 1 percentage point from here and stay there for the next two years.
That marks a big change in sentiment from earlier this year. In February the market was expecting rate cuts and the 2-year yield in the US was 3.4%.
The change reflects stronger growth numbers, higher inflation and also a reassessment of what the Fed is likely to do. Chair Warsh delivered a hawkish message at Jackson Hole in August and more importantly the Fed followed up with a 0.25% rate hike in September and hinted at further increases ahead.
Separately, in August, US Treasury Secretary Bessent announced a plan to buy back more long-term bonds and then subsequently raised the planned amount of purchases. As this has had little impact, it has created a sense that the administration may be powerless (in the absence of changing fiscal policy) about the rise in yields.
Rising bond yields increase the debt service cost contributing to a negative cycle. Once you get momentum of rising yields it can be difficult to break the loop.
Why Does This Matter?
Higher bond yields raise the cost of borrowing more generally in the economy. Corporate bond yields are typically priced as a spread over government bonds so higher government bond yields means it costs more for companies to issue debt.
From a valuation perspective higher yields mean the discounted value of future cash flows is less so in theory higher yields should weigh on equity prices for that reason.
This time the higher yields are at least partially being driven by AI capex and that same factor is boosting corporate profits. So, equities are torn between two factors (stronger growth and earnings - a positive) and higher yields (which mean discounted earnings – a negative).
However, in the past we have seen instances where equities and yields have risen together up to a tipping point and then suddenly equities have corrected as investors reassess the value of risky returns in equities versus higher and safer returns in bonds.
The most famous example of this was in 1987 when US yields rose from 7% to 10% through the year. Initially the stock market rose as the economy was hot but later in the year the market started to fall and ultimately crashed. This time the magnitude of the rise in yields is much less but investors are worried a similar dynamic may play out.
What Now for Investors?
For investors there are three key dimensions of the current bond sell-off to consider:
First, the risk to equities is growing. The trend for higher yields can continue for now but at some point we could hit a tipping point. Although the broad equity indices have remained resilient many sectors, such as industrials, materials and financials have started to trade down, a hint that higher yields are expected to act as a headwind for growth in some sectors.
For investors, ensuring portfolios are genuinely diversified and not overly exposed to equity risk is the real takeaway.
Second, the sell-off makes fixed income markets interesting. At the moment, further increases in bond yields (and lower bond prices) look likely. But at some point in the next few years there may be a big opportunity in fixed income markets. Higher yields mean that if economic growth starts to weaken, and yields start to fall, bond owners benefit from both rising prices and much higher yields/coupons.
However, timing that is difficult. Yields could rise considerably further before we hit that tipping point.
That’s why in our portfolios, and Regime-Adaptive Fund, we like to hold a small core allocation to bonds blended with exposure to tactical trend following funds. These funds are currently short bonds and will likely remain so as long as the trend of rising yields persists. But if the environment changes, growth weakens and bonds start to rise, they would mechanically respond to any change in trend by buying back short positions and going long.
Third, the risk of fiscal dominance that we highlighted in August has not gone away. Prior to the September rate increase, there was a lot of concern in the market that the Fed may be biased not to raise interest rates because it increases debt service costs for the administration - the idea of “fiscal dominance”.
Warsh has won some time and credibility with the rate increase but this structural issue has not gone away as ultimately high US debt and deficits can only be resolved by stronger growth (possible but difficult), fiscal adjustment or default (both unpalatable), or inflation (easiest option).
That tension between controlling inflation and managing an increasingly expensive debt burden is likely to remain an important feature of this new investment regime.
