Interest Rates: Higher, But Not Uncharted Territory

Interest rates have moved meaningfully higher, but today’s levels are less unusual than they may feel. We look at what is driving the rise in yields, how current rates compare with history and why higher yields may ultimately strengthen the case for bonds.

Rising interest rates have been one of the most debated developments of the year. The 30-year Treasury yield reached 5.6%, its highest level since 2002. Some of the largest moves have come in shorter-term yields, with the 2-year Treasury yield up 1.2% this year. It is fair to ask if these levels signal trouble. Our answer, offered with humility, is no, and we think history helps explain why.

The makeup of the recent rise is somewhat reassuring. Nearly all of September’s rise in the 10-year Treasury yield came from real yields, the return investors demand above inflation, while long-term inflation expectations barely moved. That indicates investors are less worried about inflation spiraling than about getting paid enough for their capital. They are demanding a higher real return because the economy is strong, investment opportunities are abundant, and governments and companies are competing for the same pool of capital. Large deficits are part of that story, but as a source of supply rather than a loss of confidence. If investors were fleeing US debt, we would expect rising inflation expectations and a weakening dollar. Instead, inflation expectations have held steady, and the dollar moved off its lows after the Fed’s hike. Both are consistent with a growing economy.

History also suggests today’s rates are less unusual than they may feel. We think it is a mistake to judge them against much of the past 15 years, when near-zero interest rates and extraordinary Fed bond purchases held borrowing costs artificially low. A better baseline is the period before the Global Financial Crisis, when rates were set with far less central bank intervention, and against that record, today looks ordinary. The 10-year Treasury yield ended the third quarter at 5.3%, below its roughly 5.5% average from 1990 to 2010. Ten-year inflation expectations of about 2.4% are in line with much of the 2000s, and real yields near 3% are well above the 2010s but comparable to the early 2000s. Yields also look reasonable relative to growth. Nominal GDP has grown 5%–6% in recent years, and the 1965–2025 relationship between growth and interest rates points to yields close to today’s levels.

In our view, the near-zero rates of the 2010s were the anomaly, and today’s levels are much closer to where they should be for an economy with this much momentum. None of this erases the disappointing returns bond investors have experienced. But the same repricing that hurt returns has rebuilt the case for owning bonds. Investors now earn meaningfully more income, and today’s yields offer a larger cushion if rates move higher from here. We expect bonds to gradually regain their traditional role in portfolios as a reliable source of income and, over time, diversification relative to equities.

US 10 Year Treasury Yield and Nominal GDP Growth

Endnotes

^1,2,3 Sourced from Bloomberg as of October 5, 2026.

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