Factors behind the rise in long-term sovereign bond yields

Yields on long‑term sovereign bonds have risen sharply since the start of the year, reaching their highest levels in more than a decade across many advanced economies.

Long‑term sovereign bond yields—a key measure of government borrowing costs—have been rising since 2021 (Chart 27). The pace of increases picked up in 2026 amid heightened volatility. This reflects multiple forces, including expectations of higher policy interest rates, rising issuance of long‑term government and corporate debt, and increased uncertainty.

The drivers of higher yields differ across countries

Long‑term yields reflect expectations for future policy interest rates and term premiums, which are the extra compensation investors demand for committing their money for long periods. Persistently elevated energy prices have led markets to expect higher policy interest rates. These developments account for the majority of the increase in yields in Canada, the United States and Germany.

However, in several other jurisdictions, rising term premiums have played a larger role. In some cases, this could reflect market concerns about the health of government finances (Chart 28).1

In the United States, there is also some evidence that part of the rise in yields reflects a small increase in longer‑term neutral interest rates.

Markets expect higher policy interest rates

The war in the Middle East and attacks on Russian refineries have led to a persistent increase in energy prices. They have also raised concerns that price pressures could spread beyond energy, leading markets to price in higher policy interest rates. At the same time, rapid investment in infrastructure related to artificial intelligence (AI)—including data centres, semiconductors and power generation—has strengthened demand and reinforced expectations for higher rates.

Term premiums are rising for a variety of reasons

Term premiums have been increasing since 2022, with estimates recently reaching their highest levels in many years in several jurisdictions. Several factors have contributed to this.

In recent years, rising government deficits have led to a notable increase in sovereign debt issuance across many jurisdictions. Meanwhile, corporations are issuing more debt to fund the AI investment boom. Given their funding and balance sheet constraints, private investors have required greater compensation to purchase these additional bonds. This has contributed to the higher term premiums observed both in recent months and over the past several years.

While markets continue to appear confident that central banks will ultimately achieve their inflation objectives, uncertainty has risen about how restrictive monetary policy will need to be to achieve this outcome. This uncertainty may be increasing the compensation investors require to hold longer‑term bonds.

Endnotes