Bond yields are rising again – here’s why investors should care

The bond market continues to dominate market discourse as yields on government debt have surged to fresh multi-decade highs.

This is putting pressure on equity markets and has heightened concerns around government finances, but what exactly is going on and why is it important to investors?

What is happening?

As a reminder, bonds are IOUs issued by governments, companies and other institutions which usually pay a fixed rate of income, with the principal returned at the point of maturity. The yields on government bonds have increased sharply, particularly on longer-term bonds. This has principally been driven by a renewed surge in oil prices as hostilities between the US and Iran have ramped up again.

Rising inflation prompted an increase in interest rates from the Federal Reserve in September 2026, the first since 2023, and this has also helped push bond yields higher.

In the US and UK and other parts of the world yields are, in some cases, above the highs they reached in the wake of the financial crisis. The US 10-year Treasury yield is above 5.3% and the 30-year yield is approaching 5.7%, while UK 10-year gilts yield around 5.5% and the 30-year has topped 6%, the highest level since the late 1990s.

Why are government bond yields rising?

The yield on a bond rises when the price falls, and, like most assets, the price is a function of supply and demand. Government bonds are in less demand thanks to the sheer scale of borrowings (with US national debt ticking over $40 trillion), rising deficits (the shortfall between the amount a country spends and how much it brings in in revenue) and concerns about inflation thanks to the crisis in the Middle East.

Mounting inflation is bad news for bonds because they mostly offer a fixed rate of return whose value is eroded by rising prices. These factors are compounded by reduced purchases of government bonds by central banks.

On the supply side, not only is the amount of debt being issued by governments continuing to go up but there’s now competition from big technology companies which are launching their own substantial bond issues as they look to fund massive spending on AI.

Why are rising yields bad for stocks?

As well as being a headache for governments trying to fund public services and their other spending, rising bond yields are typically bad news for equity markets too for two key reasons. One is they increase the cost of companies’ own borrowings which eats into their profitability.

The other is that when the yields on low-risk government bonds are higher they compare more favourably with the stock market, which is widely perceived as being a higher-risk option, making the latter a less attractive place for people to put their cash.

For consumer-facing businesses there is another challenge. Higher government bond yields feed into increased mortgage and credit card costs, putting the squeeze on their customers and affecting their ability to spend.