What's going on with bond yields and interest rates?

As you’ve no doubt noticed, interest rates are at their highest in years. And those higher interest rates are impacting the bond market, which has seen spiking yields and falling prices. These developments can have both pros and cons for investors.

We've been getting lots of questions on this topic, so let's take a look.

Q: What do interest rates have to do with the bond market?

A: To understand why and how interest rates affect the bond market, it’s important to remember that bonds are loans. Corporate bonds are loans from investors to businesses; Treasury bonds are loans from investors to the federal government. So, investors like you are the lenders fronting the cash, and the businesses and government are borrowers who use the money and pay interest.

“Yields” are the amount of annual interest you as an investor receive on bonds you own. A bond’s yield is related to the original interest rate on the loan, but it fluctuates along with the underlying value of the bond (which we’ll get into below). Recently, Treasury yields specifically have spiked to decades-high levels.

10-year Treasury yields haven’t been this high since the early 2000s

Source: Bloomberg; as of October 13, 2026. USGG10YR Index.

Q: Do rising Treasury yields represent a crisis?

A: While sharp moves in Treasury yields surprised many investors, they seem to have several underlying drivers; they're not the result of a breakdown in the economic machine. The causes of higher rates don't represent a crisis in our view, and the results don't either – they will be positive for some economic participants and negative for others (or, if you're like many people, both at once). They could ultimately be a drag on U.S. economic growth, but that doesn't seem to be happening so far.

Q: Why are interest rates higher?

A: Several factors are currently putting upward pressure on rates. The Federal Reserve has been very worried about persistent inflation and now seems set on a course of hiking interest rates. The Fed sets the overnight lending rate, and that gets headlines, but the Fed doesn’t directly control interest rates for things like mortgage rates, business loans, and Treasury bonds – the rates that really matter to households and the economy.

That said, if banks are paying more for overnight loans, they will charge more for loaning money to others. So, Fed rate increases are one reason for overall higher interest rates, not just those for loaning money for one night.

As a low-risk investment, Treasuries usually pay relatively low yields – when they go up, corporate bond yields and bank loan rates get even higher

Source: Bloomberg, Federal Reserve; as of October 13, 2026. LUACTRUU Index (corporate bonds), USGG10YR Index (10-year Treasurys), and FCPR Index (prime loan rate).

There are other reasons as well. Supply and demand affect the cost of borrowing just like they affect purchases. Right now, despite higher rates, there's a lot of demand for loans. The federal government continues to borrow heavily (by issuing new Treasury bonds) and so do many other governments around the world. At the same time, AI-related businesses are taking on massive amounts of debt to finance their spending.

Expectations for inflation also affect yields. Think about it – a CD offering a 3% annual interest rate isn’t going to be very attractive if you think inflation will be 4%. If you accepted it, you’d actually be losing purchasing power while your money was tied up. Instead, you’d expect a rate that both offset inflation and gave you a little more for the privilege of using your money. Because inflation seems to be sticking around, it’s supporting higher rates too. (However, based on long-term expectations for Treasury yields, it looks like investors do think inflation will go back down at some point.)

There appears to be a fourth factor in play as well ... risk. When risk is believed to be higher, the interest rate that a lender demands will follow suit. Importantly, the risk investors are seeing right now isn’t reflective of any worry that the US government will default. It's that the value of Treasuries may continue to go up and down as we wrestle with continued uncertainty around inflation, Fed policy, AI borrowing demands, and more.

Q: Does rising government debt threaten the economy or financial markets?

A: It can, to a limited extent. Higher Treasury yields are not a sign that investors expect the U.S. government to default on its obligations. Neither is the fact that total U.S. debt recently hit $40T – that's a psychological milestone, not a switch flip.

That said, the higher interest rates are, the more the government has to pay on its outstanding loans. A combination of increasing debt and higher interest rates doesn't hit the government in the same way it would hit a household, since the Federal Reserve can literally create more money (which, granted, is not a great solution and would cause other serious issues). But the squeeze can still reduce the budget that the government has available to spend on important services and programs.

When the government is absorbing a lot of available loan money, it can also have the effect of reducing the pool of money available to businesses to take out their own loans. That can mean those businesses are forced to slow their growth (and potentially the broader economy), a phenomenon known as “crowding out.” As we said, the borrowing needs of the U.S. government, global governments, and AI companies are very high right now. According to a recent analysis, a one-percentage-point increase in the debt-to-GDP ratio translates to about a two-percentage-point increase in long-term interest rates. So, higher rates can ultimately derail the overall economic success story.

Q: What's the risk that potential lenders are worried about?

A: Inflation has proven difficult to tamp down, and geopolitical conflict and energy prices are keeping it elevated. If inflation remains stubborn or goes higher, interest rates will likely follow suit. And that means lenders may want to hold out for those higher rates. It also means that bonds you already own are not as valuable to you, because investors would rather lend money at the new, higher rates than yesterday’s lower rates.

Q: Are higher interest rates good or bad?

A: They can be both.

Higher rates are generally challenging for borrowers because loans become more expensive. But they're often beneficial for savers and bond investors (who, remember, are lenders) because cash, CDs and bonds can generate more income.

In other words, the same higher rate that increases one person's borrowing costs may increase another person's (or even the same person's) investment returns.

Q: What do higher rates mean for bond investors?

A: There are two sides to the story here as well.

When rates rise, existing bond prices typically fall because people don't want them as much; after all, newly issued bonds offer higher yields. That's called interest-rate risk and it's what we've been experiencing since the middle of 2026. But over time, investors can reinvest maturing bonds at those higher yields, which may increase their future income and can offset the price decline.

Q: Should I change my portfolio because rates are high?

A: Not in our view. Trying to predict exactly where interest rates will go is difficult. And making moves based on what you think will happen next? That’s market timing.

One of the reasons market timing is notoriously difficult is that you likely don’t know anything about the market environment that the rest of the market doesn’t also know. Information is already baked into prices, and new information moves the market faster than you could ever react.

Thankfully, we believe market timing is unnecessary, and even more sowhen you have a long-term outlook. Instead, we believe in maintaining a portfolio where each investment serves a purpose. Stocks can provide growth potential, while bonds can provide income, diversification and stability.

Diversification is key – while bonds can fall at the same time as stocks (à la 2022), over long periods, high-quality bonds like Treasuries can provide a volatility cushion and a source of income that isn't dependent on stock market performance.

Just like a bear market in stocks doesn't make stocks a bad investment, a spike in bond yields (and drop in prices) doesn't negate the reason for owning bonds. If your goals and situation haven't changed, your portfolio probably doesn't need to change either.