Government bond yields have risen substantially, but why? There is no shortage of explanations. I examine several of them and conclude that some are convincing, but others less so. Higher oil prices and inflation explain part of the increase this year, but not the broader rise in yields since 2023. Nor does higher expected economic growth. Instead, a key part of the explanation seems to be rising risk premia, particularly on long-term government bonds, most likely driven by growing concerns about fiscal deficits and public debt. If so, the rise in yields may prove more persistent – and more worrying – than if it were simply the result of temporarily higher inflation.
Yields have risen dramatically lately. Figure 1 shows the average daily 10-year government bond yield across the US, Germany, Japan, France, and the UK since the start of the year.
Figure 1. Average yield on 10-year government bonds in the US, UK, Germany, France, and Japan. Daily data, 1 January 2026 – 10 September 2026. Source: Datastream via Refinitiv and J.Rangvid.
After yields bottomed out in late February, they have risen by a full percentage point. In the US, except for a few days in 2023, yields have not been this high since 2006 – twenty years ago. The same is true in the UK. In Japan, yields are at their highest level in thirty years.
Such high yields put strains on government budgets around the world. It also makes it harder for consumers and corporations to finance loans, as yields on mortgages and corporate loans typically follow movements in government bond yields. It is a serious matter.
But why have yields risen? Many explanations have been offered, but I think some of them miss key points. My attempt here will be to help you see through the fog and offer my take on these developments.
As a starting point, let’s recall that yields are determined by three factors:
*) The current short-term yield.
*) Expected future short-term yields.
*) A risk premium.
Nominal yields consist of real yields plus inflation. So, to understand why yields have risen, we must examine what has happened to:
*) Real yields – short and long.
*) Inflation today and expected future inflation.
*) Risk premia – on short- and long-term yields.
Oil prices and inflation
The most straightforward explanation for the rise in yields is that oil prices have risen because of the Iran War, raising inflation and, ultimately, yields.
Figure 2 shows developments in oil prices during 2026. They line up with developments in yields.
Figure 2. Oil price (WTI), USD per barrel. Daily data, 1 January 2026 – 10 September 2026. Source: Datastream via Refinitiv and J. Rangvid.
Oil prices rose after the outbreak of the Iran War in late February (Figure 2). This raised inflation (Figure 3), pushing up yields (Figure 1).
Figure 3. US inflation. Annual percentage change in CPI. Months after the Iran War in red. January 2024 – July 2026. Source: FRED, St. Louis Fed and J. Rangvid.
During early summer, oil prices fell (Figure 2), and so did yields (Figure 1). Since the war intensified again in July, oil prices have been rising, and so have yields.
So, the rise in oil prices and, consequently, the rise in inflation is certainly part of the picture. Rising oil prices and inflation raise the current short-term yield and those expected in the near future. This pushes up longer-term yields as well, but less so than the rise in short-term yields..
This is a good and simple story. Is it the full story? No.
First, even though oil prices and yields rose in tandem in March and have been doing so again since July, yields are today considerably higher than in Spring, while oil prices are lower. In other words, something else is going on.
Second, this year’s rise in yields is a continuation of the rise in yields during previous years, when oil prices were falling.
So, oil prices and their consequences for inflation are an important part of the explanation for this year’s rise in yields, but they cannot account for everything that has happened. What else is going on?
Longer data and more yields
After falling for four decades, from 1980 until the inflation flare-up in 2022 – an astonishing development that I scrutinise in my book (link) – yields rose dramatically in 2022 and 2023 and have continued to rise since then, as Figure 4 shows.
Figure 4. Yields on 10-year government bonds in the US, UK, Germany, France, and Japan. Monthly data, January 2000 – September 2026. Source: Datastream via Refinitiv and J. Rangvid.
A crucial point here is that long-term yields have risen considerably more than short-term yields.
Figure 5 shows, for the US, the levels of yields on Treasuries of different maturities, while Figure 6 shows the differences between yields on 30-year US Treasuries and yields on shorter-dated US Treasuries.
Figure 5. Yields on 1-year, 2-year, 5-year, 10-year, and 30-year US Treasuries. Monthly data, January 2023 – September 2026. Source: Datastream via Refinitiv and J. Rangvid.
We have gone from an inverted yield curve a couple of years ago – when long-term yields were lower than short-term yields – to an upward-sloping yield curve, with long-term yields higher than short-term yields.
Figure 6. Difference between yields on 30-year US Treasuries and yields on 1-year, 2-year, 5-year, and 10-year US Treasuries. Monthly data, January 2023 – September 2026. Source: Datastream via Refinitiv and J. Rangvid.
For instance, in early 2023, the 1-year yield was around five percent, while the 30-year yield was four percent, i.e. the 30-year yield was one percentage point below the short-term yield. Today, the 1-year yield is around four percent, while the 30-year yield is around five percent – a difference of one percentage point.
You see the same pattern for other maturities. For instance, 10-year yields have risen more than 1-year yields, though not as much as the 30-year yield.
I argued above that developments in inflation – resulting from higher oil prices – could partly explain what we have seen during 2026, but not all of it. If developments in inflation were also to explain why long-term yields have risen more than short-term yields since 2023, expected inflation far into the future should have risen more than expected inflation over the next few years.
We see no sign of this.
Expected inflation rates over the next five, ten, or thirty years have remained essentially flat, as Figure 7 shows.
Figure 7. Break-even US inflation rates, 5-year, 10-year, and 30-year. Source: FRED, St. Louis Fed and J. Rangvid.
This means that developments in expected inflation are not the main factor behind the larger rise in long-term yields relative to short-term yields since 2023, simply because long-term expected inflation has not risen more than short-term expected inflation.
It’s not economic growth
If it is not inflation, maybe it is the real rate. In economic models, the real interest rate is largely driven by expected economic growth. So, can higher expected economic growth explain the rise in yields?
Some – perhaps most forcefully Stephen Miran – believe so. Miran (link) has argued that yields are “rising for good reasons”, that is, that “investors are marking up their expectations for long-run economic growth” because of AI, in particular for US growth. If this were the case, there would be nothing to worry about: high economic growth would solve many problems, including the excessive fiscal deficits that we come to later.
Alas, there is zero evidence of this.
If you ask investors and non-governmental economists (link), they expect the US economy to grow by 2.1% per year over the next decade. This is, for all practical purposes, equal to the historical norm. In other words, there is no evidence that investors expect particularly high future economic growth. This therefore cannot explain the rise in yields.
If you ask the experts at the Fed, they also expect long-run economic growth of around two percent (link).
And if you ask the CBO, which makes independent long-term projections of the US fiscal situation (link), it expects – surprise, surprise – growth of around two percent over the next decade.
It is true that underlying trend growth in the US has risen during the past decade and that this has lifted equilibrium real rates somewhat from their lows after the financial crisis (link). However, there is unfortunately no evidence that higher expected economic growth – the benign explanation – is what is driving yields higher now.
It’s the risk premium
We have concluded that:
*) Oil prices and inflation can partly explain why yields are rising this year.
*) Oil prices and inflation cannot explain why yields have been rising since 2023.
*) In particular, oil prices and inflation expectations cannot explain why long-term yields have risen more than short-term yields since 2023.
*) Expected economic growth cannot explain the rise in yields.
There is then one thing left, and that is the risk premium. It turns out that this explains a lot.
Risk premia have risen significantly, and more so for long-term yields than for short-term yields, helping to explain the shift in the slope of the yield curve illustrated in Figures 5 and 6.
Figure 8 shows estimates of risk premia on Treasuries of different maturities. The picture is clear: risk premia have risen for Treasuries of all maturities, but – and this is the crucial point – they have risen more for long-dated Treasuries than for short-dated Treasuries. This is important because, as Figures 5 and 6 showed, long-term yields have risen more than short-term yields.
Figure 8. US Treasury term premia. Monthly data, January 2023 – August 2026. Source: New York Fed (link) and J. Rangvid.
Risk premia on 1-year Treasuries have increased by around half a percentage point over the past three years, whereas premia on 10-year Treasuries have increased by 1.5 percentage points. Changing risk premia thus help explain why long-term yields have increased more than short-term yields.
Notice that developments in risk premia fit well with the longer-term rise in yields since 2023, but risk premia have not increased during 2026. They therefore cannot explain the rise in US yields this year, where higher oil prices and inflation have been the dominant forces. Conversely, oil prices and inflation cannot explain the rise in yields prior to 2026, when rising risk premia appear to have been the dominant force.
Why have risk premia risen?
We cannot observe risk premia, so they must be estimated. This also means that it is difficult to pinpoint exactly what has driven the rise in risk premia. Still, there is an abundance of academic research indicating that excessive fiscal deficits and rising public debt drive up risk premia. Here are a few recent papers:
*) Bi et al. (2026, link) conclude that “debt expansion shocks raise yields across the curve by increasing term premia”.
*) Diercks & Asnani (2024, link) show that the rise in yields they study – during the second half of 2023 – “was primarily driven by an increase in term premiums, fuelled by the combination of quantitative tightening, greater Treasury issuance, and heightened uncertainty about the economic outlook”.
*) Bhatt et al. (2026, link) find that a “1 percentage point increase in the expected US debt-to-GDP ratio leads to an increase of about 1–2 basis points in the longer-run neutral rate (r*) and of about 2–3 basis points in the 10-year Treasury term premium”.
Debt developments
As you probably know, many countries, not least the US, face unsustainable debt trajectories. Figure 9 shows the historical development of the US fiscal balance as a percentage of US GDP, together with projections of what is to come if policies are not altered.
Figure 9. US fiscal balance as a percentage of US GDP. Annual data, 1900–2056. 2026–2056 are projections. Source: CBO and J. Rangvid.
Today, the US fiscal deficit amounts to more than five percent of US GDP. Given that the US economy is doing well, with solid growth and low unemployment, such a huge deficit is indeed worrying. Imagine what it would look like in a crisis.
Moreover, there are zero signs that the deficit will shrink. In fact, the CBO projects the opposite: the US fiscal deficit will widen considerably, approaching around ten percent of GDP in a couple of decades, as Figure 9 shows.
Because of these developments, the outlook for debt is equally worrying, as Figure 10 shows.
US government debt is on a trajectory towards 200 percent of GDP. And again, this assumes that the US economy will not run into a recession or another type of crisis – an unlikely assumption over such a long horizon. Should a crisis occur, the deficit would widen even further.
Figure 10. US federal debt held by the public as a percentage of US GDP. Annual data, 1900–2056. 2026–2056 are projections. Source: CBO and J. Rangvid.
These projections are based on relatively stable long-term (10-year) interest rates. In its projections, the CBO assumes that interest rates will rise only modestly from where they were at the time of the projection – in this case around 4.3%, as they were when the CBO made the projections in February 2026. Already today, rates are around five percent. If rates stay at five percent, or rise further, the outlook is even darker. No wonder markets are getting nervous.
Other factors
There are good reasons for markets to focus on unsustainable fiscal policy in many countries, not least the US, but risk premia can increase for other reasons too.
The world is uncertain, and very much so. There is uncertainty about geopolitics, AI, climate risk, and much more. It is likely that risk premia have also increased because of this heightened uncertainty.
In addition, bond issuance from hyperscalers is enormous, competing with sovereign issuers for investors’ money. This higher supply of bonds has probably also contributed to pushing up rates.
And there might be more. I believe these factors matter, but we do not have clear estimates of how much they are driving long-term interest rates. Also, while hyperscaler bond issuance may help explain some of the rise in yields in 2026, it cannot explain why yields rose in 2023, for example, simply because hyperscaler issuance was still small back then. On the other hand, and as mentioned above, research finds that increased Treasury issuance contributed to the rise in yields at the time. For these reasons, I emphasise the importance of debt in understanding the developments in yields that we are seeing these years.
Conclusion
So, what lies behind the rise in yields? Part of the increase this year is straightforward: the Iran War has pushed up oil prices and inflation, thereby raising interest rates. But this cannot explain the broader development. Yields were already rising before the war, long-term yields have risen considerably more than short-term yields, long-term inflation expectations have remained stable, and there is little evidence that investors have become substantially more optimistic about long-run economic growth.
The more concerning explanation is that investors are demanding higher compensation for holding long-term government debt. Risk premia have risen substantially, particularly at the long end of the yield curve. There are probably several reasons for this, but growing fiscal deficits and rapidly rising government debt appear to be an important part of the story.
Debt dynamics may also be feeding on themselves. We could be moving towards a bad equilibrium: when investors become concerned about the outlook for government debt, they demand greater compensation for bearing this risk. Higher yields then worsen the fiscal outlook even further, which in turn may lead investors to demand still higher risk premia.
This is a vicious cycle, and a difficult one to escape. It also means that the rise in yields should not simply be dismissed as a temporary consequence of higher oil prices and inflation. If markets are increasingly pricing the risks associated with unsustainable fiscal trajectories, higher long-term yields may be with us for some time.
