Interest rates in the United States have moved meaningfully higher in 2026, with the 10-year Treasury yield reaching approximately 4.7 percent, a level rarely seen since before the Global Financial Crisis (GFC) era of ultra-low rates. The questions on many investors’ minds are, “Why now, and how long will this last?” The answer is not simple; it reflects a convergence of structural, cyclical, and policy forces that have been building for years.
1. Supply and Demand for U.S. Treasuries
At its most basic level, the price of borrowing money, the interest rate, is set by supply and demand. When the U.S. government needs to borrow money, it issues Treasury bonds. Investors buy those bonds, and the interest rate they demand reflects how attractive, or risky, they find the investment. Two major shifts have been underway for more than a decade that are now putting meaningful upward pressure on yields.
The Changing Buyer Base
For much of the 2000s and early 2010s, foreign central banks — particularly China, Japan, and other export-oriented economies — were among the largest and most reliable buyers of U.S. Treasuries. The Federal Reserve also became a significant owner of Treasuries when implementing its series of Quantitative Easing (QE) programs starting in 2008. These “non-economic buyers”¹ purchase Treasuries not primarily for return, but for strategic reasons, such as managing their currency, recycling trade surpluses, supporting their domestic economies through monetary policy measures, or meeting regulatory requirements. Their combined ownership of U.S. Treasuries represented about 60 to 75 percent of the outstanding publicly held U.S. Treasury debt from 2005 through 2022 (Figure 1). Their steady demand helped keep yields artificially suppressed.
That dynamic has shifted materially. The funding needs of the U.S. government are increasingly being filled by what I would define as “price sensitive buyers.”² These buyers, to varying degrees, demand higher yields to compensate for the risk they are incurring. The relative ownership of publicly held U.S. Treasuries from this group has increased notably since 2022, concurrent with the rapid increase in interest rates.
Figure 1: Ownership of U.S. Treasury Debt (in $billions)
Source: Bloomberg LP (ECAN World Macroeconomic Analyzer
An Avalanche of New Treasury Supply
The supply side of the equation is equally important. The U.S. government has been running persistent and large fiscal deficits by spending more than it collects in taxes while financing the gap by issuing new debt. Total Treasury securities outstanding have experienced a nearly eight-fold increase in the past two decades. With no credible path to deficit reduction in sight, the market must absorb ever larger quantities of new issuance each year. When supply increases, buyers become more price sensitive.
2. The AI Buildout: A Capital Expenditure Supercycle
One of the most significant economic developments of the past several years has been the explosion in capital spending to build artificial intelligence infrastructure. This investment wave has been financed through a combination of retained earnings, equity issuance, and debt. Corporate bond issuance to fund AI buildout has added to the overall demand for investor capital, competing with government borrowing and coming exclusively from the price sensitive buyers mentioned above. This has put upward pressure on the cost of funds across the economy.
Beyond the financing effect, AI buildout has created acute shortages in key inputs. Advanced semiconductor chips, electrical power capacity, cooling systems, and skilled labor are all in short supply relative to demand. These bottlenecks have pushed input costs higher across the technology and energy sectors, contributing to broader inflationary pressures. The hope is that these pressures are short term in nature and the disinflationary forces from anticipated productivity gains will be evident in the medium to longer term.
3. Economic Growth Has Remained Solid
No Meaningful Recession Since 2020
A key reason interest rates remain elevated is that the U.S. economy has not needed the support of low rates. After the sharp but brief COVID-19 recession in 2020, the economy rebounded sharply and has grown at a relatively steady pace. Real GDP growth has remained in the 2 to 3 percent range for most of the period from 2022 through mid-2026. Sustained deficit spending by the federal government has been a significant contributor, effectively injecting demand into the economy even as monetary policy has tightened.
Stocks Appreciation Supporting Consumer Spending
The S&P 500 returned over 150 percent from January 2020 to approximately 7,641 as of August 20, 2026. This significant appreciation in equity wealth has supported consumer spending through what economists call the “wealth effect.” A consumer who continues to spend does not require the stimulus of lower interest rates, reducing the urgency for the Fed to lower interest rates.
Higher Yields Boosting Savers’ Income
In a somewhat self-reinforcing dynamic, higher interest rates have become a source of economic support. U.S. households received a notable increase in interest income earned in the past five years (Figure 2). For the large and growing cohort of retirees and near-retirees holding interest-bearing securities, higher rates represent a meaningful boost to disposable income, further sustaining consumer spending and reducing the need for rate cuts.
Figure 2: U.S. Household Personal Interest Income (USD Billions)
Source: Federal Reserve Bank of St. Louis (FRED)
4. The Long Road Back to Normal: Unwinding Decades of Unconventional Policy
Current Rates Remain Below Pre-2008 Levels.
It is worth considering a longer historical context. The interest rate environment of 2010 to 2021 was deeply abnormal by any historical standard. Following the GFC, the Federal Reserve and other major central banks held rates near zero and purchased trillions of dollars of government bonds to suppress long-term yields.
As Figure 3 illustrates, today’s yield levels, while higher than the post-GFC era, remain below the levels that prevailed in the 1990s and early 2000s, when the U.S. 10-year yield regularly traded between 4 and 7 percent. In that sense, what we are experiencing is a normalization, not an aberration. The chart also shows that Japan is “normalizing” in an expedited manner, which could cause financial stability issues.
Figure 3: 10-Year Government Bond Yields: U.S., Germany & Japan (1995–2026)
Source: Bloomberg LP
Investors Are Paying Attention to Deficits Again.
For much of the post-GFC era, bond markets largely ignored government deficits, confident that central banks would step in as buyers of last resort through QE measures. That confidence is eroding. With the stock of government debt now at historically high levels across developed markets, investors are once again pricing in fiscal risk. The pathway to meaningful deficit reduction appears politically unlikely in the U.S., Europe, and Japan alike. Investors are once again demanding a term premium: extra compensation for the risk of holding long-duration debt. This has evoked concern from U.S. Treasury Secretary Scott Bessent who recently announced measures designed to support long maturity Treasuries.
Looking ahead, the relative fiscal discipline of different governments is likely to matter more for interest rate differences between countries than it has in the recent past. Countries that demonstrate credible plans to manage their debt burdens may see their borrowing costs diverge favorably from those that do not.
5. Inflation Remains Above Central Bank Targets.
A Series of “One-Time” Shocks That Never Quite Ended
Perhaps the most fundamental driver of higher rates is the persistence of inflation above the Fed’s 2 percent target. Since 2020, the U.S. economy has experienced a series of inflationary shocks, each initially characterized as temporary or “transitory.” Pandemic-related supply chain disruptions, massive fiscal stimulus, the energy price spikes following geopolitical events, and the AI infrastructure buildout have each added to the cumulative price level.
A New Fed Chair with a Clear Mandate
The Federal Reserve’s approach to this challenge has taken on new urgency under Chairman Kevin Warsh. Warsh has been explicit about his desire to reduce the Fed’s balance sheet, arguing that the central bank’s outsized presence in financial markets distorts price signals. As illustrated in section one, a smaller Fed balance sheet means fewer non-economic buyers of Treasuries, adding further upward pressure on yields. Bond traders and Warsh appear aligned on a key point: The inflation fight is far from over.
Summary
The rise in U.S. interest rates in 2026 is not the result of any single factor. It reflects the convergence of factors highlighted here and other technical and market-based factors. For investors, the key takeaway is that the era of near-zero rates was the anomaly. The current environment, while challenging for some borrowers, may represent a more sustainable and historically normal backdrop for capital markets while providing a better profile for total return expectations from the fixed income asset class. If you’re concerned about how the current interest rate environment impacts your financial plan, please reach out to your HBKS advisor.
¹ Non-economic buyers: foreign central banks, the Federal Reserve and commercial banks
² Price sensitive buyers: money market funds, households, mutual funds/ETFs, broker/dealers, insurance companies, pension plans, state and local governments
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