Graphs, Data, Perspectives | US Treasury yields at 25-yr high: What are bond yields, what happens when they rise

On Tuesday, the 30-year US Treasury bond yield reached its highest level in nearly 25 years. This type of bond, an IOU document from the US government, indicates the return on investment for lenders who loan money to the government for a specific period. For instance, a 30-year bond signifies a loan repaid over that duration. The chart reveals that yields have increased not only for long-term borrowing but across all durations.

So why are bond yields rising? Although the government specifies the coupon, or annual payment, at the bond's issuance, the secondary market's secondary trading impacts yields. If the US government issues a $100 bond with a $10 coupon (10% return), but inflation spikes later, the real value of that $10 payment decreases. Consequently, investors may seek better returns elsewhere, driving down the bond's price and increasing its yield.

Rising bond yields carry implications for both the US government and other borrowers. Firstly, they signal higher borrowing costs for the US government. If yields on existing bonds rise, the government must match them to attract investors for future borrowing, which means spending more on interest payments and less on other priorities.

Secondly, higher yields affect the borrowing costs for all other governments and businesses. Lenders demand higher returns due to the perceived safety of US government bonds — if these yields rise, other loans become costlier. This situation is exacerbated by the high global debt levels and increasing borrowing by businesses, particularly in the AI sector. Overall, rising bond yields signal deteriorating economic conditions, making them a cause for concern.