discussion.fool.com - Bond yields are returning to normal

I have spent many hours and read books about the history of the modern financial system, which is heavily reliant on debt.

Where there is debt there will be interest rates. The price of a bond, like any asset, depends on supply and demand. If lenders don’t think that the risk-reward balance is adequate they will hold out for higher interest rates. The price of a bond moves opposite to its yield so rising interest rates force bond prices to fall, which some writers call a “bond rout” since all previous bonds will drop in value.

The book, “The Price of Time,” by Edward Chancellor describes interest rates since the inception of modern economies. He quotes Walter Bagehot’s 19th century aphorism, “John Bull can stand many things but he cannot stand two per cent,” to illustrate that 2% is an unacceptable yield.

England had a large, active financial market long before the U.S. Low bond yields drove investors into “TINA” stock bubbles.
Mauldin Economics
John Bull and Two Percent

The economics profession has long had a vigorous academic argument over “natural” interest rates. What would rates be if we could somehow remove all the subjective actors—central banks, commercial lenders, government agencies—that conspire to set...

While the stock market tends to focus on the overnight fed funds rate, the 10 year Treasury yield is far more important since many long-term loans are based on it. But the yield that matters to lenders is the REAL yield, which is the yield after inflation takes its bite.

10-Year Real Interest Rate

The Federal Reserve deliberately suppressed long-term Treasury real yields after 2007 to below 2% using the vast fiat money tsunami called “QE.” At times, the real 10 year yield was under zero, where lenders were paying borrowers to borrow money. Ridiculous!

Since 2022, when the Fed stopped QE and began to slowly, slowly let their bonds mature without replacing them, the 10 year real yield has bounced in a stable channel just below 2%.

Since June 2026, the 10 YT real yield has crept above 2%. That should be the minimum real yield but bond traders are freaking out because all their existing bonds - $Trillions - are dropping in value.

wsj.com - Bond market interest rates investing economy
High Anxiety in the Bond Market


A return to pre-2008 interest rates isn’t cause for financial panic.

By The Editorial Board, The Wall Street Journal, Aug. 18, 2026

Apparently “rout” is the new word for interest rates returning to a historical norm. That’s one impression from the freakout now attending a repricing in global bond markets that’s resetting the global financial system to its pre-2008 level...

In other words, yields finally are reverting to normal after the low-rate era following the 2008 financial panic and European sovereign crisis. ...

While it sounds frightening to say rates are higher than they’ve been in nearly 20 years, the past two decades are the era that was abnormal. The U.S. economy has survived—thrived, actually—during periods of higher interest rates. The return of normality augurs well for the productive allocation of capital, which is good for growth and job creation...[end quote]

The TIPS yield has been rising along with the Treasury yield, which shows that the rise in the Treasury isn’t due to concerns about inflation (since the TIPS is inflation-adjusted). The rising yields are due to supply-demand balance in the bond market. The market is expecting supply of bonds (increase of borrowing) to rise faster than the amount lenders are willing to buy.

Now that bond yields are finally rising, all debtors will be pinched by higher interest rates. Normally the Fed controls interest rates but now Treasury is actually buying back bonds to suppress yields.

wsj.com - Stock market today dow sp nasdaq

Stock Market Today: Bond Yields Dive After Bessent Steps Up Buybacks
Treasury says it doesn’t intend to ‘mitigate episodes of acute market stress’

U.S. government bond yields are sliding after the Treasury Department said it would at least double the amount of bonds it buys back.

The move comes after the 30-year U.S. Treasury yield hit its highest level in 19 years earlier this week, amid investor anxieties over fiscal deficits, heavy AI borrowing and inflation that pushed up borrowing costs around the world... [end quote]

How can Treasury, which is deeply in debt, buy back bonds?

Treasury issues bonds that are in demand (short-term bonds) in order to buy less-liquid long-term bonds, especially older ones that aren’t in demand. That is neutral regarding the level of the overall federal debt but it suppresses the yield of the longer-term bonds. That’s called “yield curve smoothing” since the yield curve has been changing much more at the long durations than the short durations.

Treasury can do this indefinitely but there’s a limit. The Treasury Borrowing Advisory Committee (TBAC) historically recommends that short-term Treasury Bills make up 15% to 20% of total outstanding debt. It also exposes the Treasury to short-term interest rate swings which are heavily impacted by the Fed. If the Treasury pressures the Fed to suppress interest rates it's "fiscal dominance" which has led to inflation many times in the past.

Treasury yields have a huge impact on the federal debt. Also on companies that need to borrow for new projects (AI, etc.) and/ or to refinance existing debt which is maturing.

Wendy