U.S. Treasury yields are rising sharply at a bad time. Here’s what’s behind this move

This comes at a particularly bad time, with government bond yields continuing to rise and rising interest rates exacerbating the impact of the nearly $40 trillion government debt burden.

Long-term bonds have been particularly hard hit by the recent rally, with 30-year bond yields rising near their highest levels since the early 21st century. Other maturities are also rising due to a combination of factors that raise funding costs.

Bond strategists believe there are a number of variables at play in the worsening budget deficit that began in June. Despite the data being moderate over the past two months, inflation has remained in an ominous pattern above the Federal Reserve’s 2% target. and a surge in corporate bond issuances that compete with the Treasury for investor favor.

Broadly speaking, this movement can also be attributed to an increase in the term premium, or the additional yield that investors demand for holding U.S. Treasuries.

A combination of factors has created a difficult environment for the bond market, but the stock market has not yet been hit hard. Yields turned lower on Tuesday, easing a trend that had seen the 30-year Treasury yield rise more than 40 basis points (0.4 percentage point) from its low in late June.

“These are not new forces and the rise in long-term yields is occurring gradually rather than suddenly,” Anshul Pradhan, head of U.S. rates research at Barclays Capital, said in a note to clients on Monday. “What is notable today is not that these pressures exist, but that they appear to be strong enough to overwhelm individual soft data releases. This month, three separate releases claimed yields were falling, but long-term rates rose anyway.”

multiple causes

Indeed, recent inflation data is at least trending in the right direction. Consumer prices and producer prices were almost unchanged in July, and the core index excluding food and energy was 2.5%, essentially the level before the war with Iran began in late February.

But recent moves appear to be aimed at more than just inflation.

First, there is the debt and deficit situation.

The U.S. budget shortfall in July was $432.3 billion, the largest single month increase since March 2021, and it is likely to be a $2 trillion deficit for the full year ending September 30. Total government debt is just under $40 trillion, and the public portion of that debt will soon reach 100% of gross domestic product.

Debt financing costs are expected to total $1.12 trillion by July and $1.37 trillion for the full fiscal year, about $84 billion more than in 2025. In net terms, the government spent more on debt financing this year than on anything other than Social Security and Medicare.

Market veteran Ed Yardeni coined the term “bond vigilantes” in the early 1980s to describe bond investors who go on strike to protest poor financial conditions. In an interview with CNBC, the head of Yardeni Associates said that while it has been largely constructive for both the bond and stock markets, “we’re kind of testing the outer limits of where bond vigilantes actually start protesting.”

“They’re concerned that the Fed isn’t vigilant enough about inflation, and they’re concerned about oil prices,” he said. “But at the end of the day, bond yields wouldn’t be here if the economy wasn’t strong. So I see this as a vote of confidence in the strength of the economy.”

AI issuance factor

Bonds also face other challenges.

The surge in investment in artificial intelligence has coincided with a rush of companies entering the market in search of capital.

U.S. companies have issued nearly $1.7 trillion in bonds so far this year, up 27% from a year ago and more than in all of 2025 combined, according to data from the Securities Industry and Financial Markets Association. This trend is also reflected overseas, with government bond yields soaring around the world.

U.S. Treasury bonds are typically considered the deepest and most liquid market in the world. But that doesn’t mean there’s no competition.

“In addition to concerns about rising government debt, the record pace of corporate bond issuance has significantly increased duration supply to the U.S. bond market, impacting the outright level of yields, the shape of the yield curve, and term premiums,” Ian Lingen, head of U.S. rates strategy at BMO Capital Markets, said in a note.

“Barring a slowdown in market duration supply, a sharp tightening of financial conditions, or a darkening of the economic outlook, the path of least resistance is likely to favor higher long-term rates in the near term,” he added.

Fed factors

Then there’s the Fed itself.

New chairman Kevin Warsh has remained mum on where he sees interest rates heading, while maintaining his disdain for forward guidance. Yields have risen even though the Fed has kept its benchmark interest rate steady throughout the year in a range of 3.50% to 3.75%, with a suddenly opaque central bank adding another layer of stress to a market already balancing multiple other risks.

According to CME Group’s FedWatch tool, the market is currently pricing in a remote possibility that the Fed will raise rates at its September meeting, and in fact does not expect a rate hike to be likely until December. As a result, markets are questioning whether the Fed is as adamant about its 2% inflation target as official rhetoric suggests.

Still, Yardeni expects the market to be less susceptible to the Fed and expects rising yields to quickly attract buyers.

“The bond market is actually finally working the way it should. It’s allocating capital efficiently,” he said. “They weren’t doing that when the Fed was basically manipulating the bond market by lowering the federal funds rate to zero and keeping bond yields near zero. So this is kind of a return to market-driven interest rates.”