Sahil Kulkarni — September 7, 2026
Investments in financial systems are determined by the need to mitigate risk. In the United States, the most stable asset is investing in the US Government itself. This is known as a Treasury bond. Bonds are bought at a specific face value and expire at a fixed maturity date. In the duration between purchase and maturity, the bond repays a fixed annual coupon rate (dependent on Fed rates), calculated as a percentage of the face value. The main bond maturity periods are 10 and 30 years. As an example, a 10 year bond bought for $1000 dollars with a 5% coupon rate will pay $50 every six months. Then, after 10 years, I will receive my $1000 back.
This contractual agreement with the U.S. federal government always stays constant regardless of market conditions: a 10 year bond bought for $x at a y coupon rate will pay $x in 10 years while paying y annually. However, bonds can also be sold on secondary markets to other investors. Here, the face value of the bond doesn’t necessarily equal the market value of the same bond. Imagine holding a 10 year $1000 bond with a 5% coupon rate. If (for reasons discussed later) the secondary market (“market”) values the same bond at $1200, investors will sell to the market. However, as the USFG is bound to the original contract, it will continue to pay a coupon rate of 5% with respect to the face value of $1000, not the market value of $1200. So, it will continue to pay $50 instead of $60. This discrepancy between the true coupon rate and the effective coupon rate is resolved by a new metric called the yield of a bond. Yield measures the annual return as a percentage of market value. Thus, in this scenario, if market prices hit $1200, the yield is at around 4.17%. We can also imagine prices moving in the other direction. Market bond prices dropping to $800 (at the same 5% $1000 original bond) brings yields up to 6.25%. Obviously, if the market values bonds the same as the treasury, coupon rate = yield rate.
The last thing to establish before discussing the current bond crisis, is a more nuanced understanding of yields. While the simple yield rate only measures the coupon value as a percentage of the market value, the yield to maturity (YTM) rate also considers the money that will be gained or lost when the bond matures. YTM will be referred to as yield for the remainder of this brief. The general trend is that high bond prices = lower yields and vice versa.
This is the specific context necessary for the current yield crisis. Across the developed world, including in the US, yields for both 10 and 30 year bonds have risen dramatically to all time highs since 2023. The 10 year rate is 4.79%, while the 30 year rate is 5.24%. There are two principal causes for this: bond supply and the actions of the Federal Reserve.
The supply layer goes back to simple economics. When supply is high relative to demand, prices will lower. In the United States, supply is very high. This is because the function of bonds on the government end is to finance debt that the government undertakes. As of September of 2026, the federal debt has eclipsed 40 trillion dollars. This means that the government owes bond owners a collective 40T. This issue is uniquely important today, because as the federal debt continues to increase, the government must pay more and more each year for coupon and maturity payments across many bonds. While government spending has continued to grow, the only way that these loan repayments can be afforded is if more loans are taken to pay back current ones. Thus, as time goes forward, more bonds must be issued to repay current ones, which will snowball into even more bonds needing to be issued to repay tomorrow’s ones. As supply skyrockets past demand, prices fall and yields increase.
Inflation and the Federal Reserve also play a key role in this process. A coupon is worth less in real terms the more inflation erodes it, so persistent inflation pushes nominal yields (real YTM yield + inflation) up. Inflation has stayed elevated, and investors are demanding higher yields to compensate for the risk that it doesn’t come down soon. Oil prices have become a proxy signal for this: when oil rises, it reads as an inflation risk, which pushes Treasury yields up in tandem. On top of that, markets have been repricing toward a more hawkish Fed, which feeds directly into long yields.
Compounding factors continue to make this a developing situation, one that will affect the American economy and the average American’s pocket. Whether or not rising bond yields will continue to drive up the national debt remains to be seen, but at the present moment, it appears to be a dangerous driver to watch out for.
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