The U.S. 10-year Treasury yield stands at 4.4%, well above the past decade average of 2.8%. The UK’s 10-year gilts have climbed to 5.1%, Germany’s Bunds have reached 3.2%, and Japanese 10-year notes have hit 2.8%. In this newsletter, we analyze the drivers behind this uptrend and the reaction of our Consensus Forecast.
Higher fiscal deficits at play: Massive fiscal stimulus – estimated at over USD 4 trillion over the next decade in the U.S., for example – has forced governments to ramp up bond issuance, flooding markets with supply and pushing yields up. Germany, Japan and South Korea are joining the U.S. with expansionary fiscal policies of their own.
Inflation persists above target: Inflation sits above central bank targets in several major economies amid the knock-on effect of the Iran war – and could rise further. As a consequence, bond vigilantes are demanding higher premiums to compensate for mounting inflation risks.
Rate-cut expectations collapse: Another way the Iran war is supporting bond yields is by pushing back expectations for rate cuts. Our panelists have sharply scaled back their forecasts for 2026 rate cuts in several major economies: The Federal Reserve and the Bank of England are projected to keep rates at current levels through the end of the year, while central banks in the euro area and Japan should deliver additional rate hikes.
Forecasts rise in tandem: As a result, since the start of 2026, our panelists have upgraded their 10-year yield forecasts in response to rising inflation, surging fiscal issuance and diminished rate-cut expectations. In most countries, 10-year yields are also expected to rise over the course of 2026.
Insight from our analysts:
Commenting on the drivers behind the rise in 10-year yields, Berenberg analysts stated:
“Government bonds quickly priced in the emerging inflationary risks […]. Central bank interest rate cuts, which markets had still been hoping for at the start of the year, were priced out of the market, and expectations were reversed. In fact, against a backdrop of inflation rising to over 3%, the ECB raised its key interest rate by 25 bp in June. However, our economists do not anticipate any further interest rate hikes. Nevertheless, we see little upside potential in government bonds in the medium term. This is because, despite the easing of tensions in the Middle East, yield trends in the Eurozone and the US are likely to reflect the elevated level of inflation – alongside abating macroeconomic headwinds.”
Moreover, ANZ analysts added:
“While geopolitical uncertainty would typically support bonds, a sharp rise in oil prices renewed inflation concerns and reduced the usual flight‑to‑quality appeal. In fact, several markets moved from pricing in the likelihood of interest rate cuts, to expecting rate hikes. The yield on the US government 10-year bond rose […] with European and UK bond yields trending in the same direction. Japanese government bonds were also notably weak, reflecting expectations of further normalization in domestic monetary policy.”
Our latest analysis:
The Bank of Japan resumed its tightening cycle in June.
The Federal Reserve stood pat in June.