Global bond yields are on the rise, and investors are taking notice. In this video, we discuss the factors pushing yields higher and provide perspective for client conversations.
Why Higher?
- Lower Demand – Inflation: CPI inflation has climbed from 2.3% in early 2025 to 4.2% in May of this year. Investors demand compensation for holding inflation risk over the next 10-30 years, putting upward pressure on the back end of the curve as demand falls. Additionally, the expectation that the Fed will hold rates elevated to curb inflation anchors longer-term rates higher.
- Higher Supply – Debt/Deficit: The US is currently running annual deficits between 6%-7.5% of GDP, and the Debt/GDP ratio is expected to climb from 117% to 128% by 2030. Tariff refunds and the war in Iran have been additive to costs, but interest expenses are rising as well, becoming their own feedback loop. New debt is being issued at higher rates than what’s maturing, causing costs to increase, which puts further pressure on rates. More supply is flooding a market with falling demand.
- Credit Markets – Increasing Issuance from Hyperscalers: AI capex has defined this leg of the bull market, but free cash flow to finance the spending is drying up, causing the hyperscalers to become more reliant on debt to continue spending. Markets have noticed and spreads on these companies’ debt are increasing, pushing their coupon rates higher. While spreads remain broadly tight, increasing spreads on top of increasing yields is an expensive combination for these companies.
Reasons Not to Panic
- The 2010s were the Interest Rate Anomaly, not the 2020s: In the context of just the last 20 years, the current interest rate environment looks extreme. However, in a much broader historical context, the recent backup looks more like a return to normalcy than an anomaly. The average 10-year Treasury yield since 1962 is just under 6%. Perspective can help frame client conversations.
- Broadly, Spreads Remain Well-Behaved: While the market is beginning to demand more compensation for the credit risk of specific companies, spreads broadly remain near century tights. Credit markets are pricing a good-times scenario: solid balance sheets, contained defaults, and healthy growth. This is a signal from the market that in credit, concerns are specific to certain companies and not a market-wide story. Strong security selection in the bond space can be accretive when only select companies see spreads widen.
- Inflation Expectations Remain Well-Anchored: The 5-year and 10-year inflation break-evens are equal at 2.34% per year. While above the Fed’s 2% target, this number does not reflect a continuation of current inflation trends, reflecting the market’s belief that disinflation is on the other side of this situation.
- Market Expects Free Cash Flow to Recover: While low free cash flow is a current issue for hyperscalers, the market doesn’t foresee it being a long-term one. The consensus is for these companies to begin seeing returns on their investments in the next few years, and free cash flow to surpass its previous highs by the end of the decade. If so, mega-cap companies would again become less reliant on debt to finance their spending, reducing supply and putting downward pressure on spreads.
- The Treasury has Shown a Willingness to Intervene: Last week, Treasury Secretary Scott Bessent announced a plan to double their debt buyback operations, which briefly caused yields to fall before reverting back above their previous level. While this intervention has not yet quelled any of the market’s concerns, it does show a willingness to get involved and use the tools at the Treasury’s disposal when it deems the bond market in trouble.
While the recent action in the bond market certainly warrant’s Wall Street’s attention, we think providing perspective can be a better solution for clients than the ominous headlines they may be seeing in the news. Please reach out to our team with any questions at OPSResearch@orion.com, or at either of our personal emails below.
