CONTRIBUTORS
Paul Mielczarski
Head of Global Macro Strategy,
Brandywine Global
The Real Story Behind Rising Bond Yields
US 10-year Treasury yields have climbed roughly 50-basis points since the start of 2026. This is not an inflation scare. Despite the sharp rise in energy prices following the outbreak of war with Iran, market-based measures of medium-term inflation expectations have drifted lower. The entire repricing has come through real yields, with the 10-year real rate now approaching 2.5%.
Growth Is Doing the Heavy Lifting
US real yields have been rising because despite multiple shocks, the US economy continues to surprise to the upside. Growth has been supported by artificial intelligence (AI) capital expenditure super-cycle and resilient consumers. The first half of 2026 has brought early signs that corporate investment is broadening beyond AI. We are also seeing tentative improvement in employment growth, which until recently has been a notable soft spot. Together these developments suggest the expansion is becoming more self-sustaining.
The Market Is Repricing Neutral
The rise in real yields also reflects a structural re-assessment of the neutral real policy rate. The confidence bands around r-star estimates are enormous. But the broad contours of the debate are clear. Before the global financial crisis, the neutral real rate was generally estimated at 2%–2.5%. During the 2010s, amid secular stagnation fears, estimates collapsed toward zero. Today, the Federal Reserve (Fed) and most sell-side economists put neutral real policy rate at around 0.75%-1.00%.
Market-implied estimates of the natural real rate have been rising and now approach 1.8%–2%. If monetary policy was genuinely restrictive as the Fed estimates suggest, we would expect to see the evidence. Instead, financial conditions are very easy, growth is decent, and credit growth is picking up. The most logical explanation is that the neutral rate is higher than official estimates suggest and the bond market is pricing this accordingly.
US Real Long-Term Policy Rate: Market Estimate vs Professional Forecasters
2004-2026
Sources: Bloomberg, JP Morgan and Macrobond. Analysis by Brandywine Global. As of July 29, 2026. FOMC represents Federal Open Market Committee. Highlighted areas represent times of economic recession.
The Asset Allocation Angle
Where does this leave investors? In the near term, robust growth justifies real yields staying elevated.
But from a medium-term asset allocation perspective, the calculus is shifting. Real yields approaching 2.5% may represent genuinely attractive compensation for a risk-free asset. The spread between the US 10-year real yield and the S&P 500 dividend yield is now at its widest since the early 2000s. Bonds have not offered this kind of relative value versus equities in over two decades.
US 10-Year Real Yield Minus S&P 500 Dividend Yield
2004-2026
Sources: Bloomberg, JP Morgan and Macrobond. Analysis by Brandywine Global. As of July 29, 2026. Highlighted areas represent times of economic recession.
The rise in real yields reflects a healthier economy and a recognition that the ultra-low neutral rates of the 2010s were an aberration, not a permanent state. That repricing has been painful for bond holders. But the upside is that bond holders can now earn a real return that is competitive with other major asset classes, and with considerably lower volatility.
Conclusion
In short, rising real yields are not simply a headwind for markets; they are also a signal of a more resilient economy and a meaningful reset in the return potential of high-quality bonds. For investors, the key takeaway is that fixed income once again offers compelling real income, diversification and relative value after years of unusually low yields.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
There is no assurance that any estimate, forecast or projection will be realized.
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