• Government bond yields have risen sharply across several major economies this year, as an energy-driven inflation shock meets high levels of government debt
  • Two broad forces are driving much of the move: markets pricing a higher path for interest rates as inflation risks rise, and investors demanding greater compensation to hold long-dated government debt amid heavy borrowing and fiscal uncertainty
  • In the UAE, the dirham’s dollar peg can pass US rate moves through to local borrowing costs, as September’s base-rate increase showed

A bond yield is the return investors demand for lending money to a government. When bond yields rise, that government pays more to borrow, and so do the households and companies whose loans are priced off it.

This year, yields have been rising across several major economies at once. France sold 10-year debt at its highest rate since 2008 in early September. ⁽¹⁾ Japan’s 10-year yield reached its highest level since 1996 on September 24. ⁽²⁾ A day earlier, the US Treasury‘s daily yield curve put the 30-year yield at 5.40%. ⁽³⁾

Several forces are behind the move, and they feed into one another.

An Energy Shock Revived Inflation Fears

A bond pays a fixed amount of interest. Inflation eats into what that fixed payment is worth.

So when investors expect prices to rise faster, they ask for a higher yield before lending.

The conflict in the Middle East supplied that expectation, as higher energy costs pass through into fuel, transport and goods prices. The European Central Bank said this month that the conflict “continues to generate inflation pressures,” and its staff now project eurozone inflation averaging 3.0% in 2026, well above the 2% target. ⁽⁴⁾

Central Banks Went Back to Raising Rates

Central banks responded to that inflation risk. On September 10, the ECB raised its deposit rate by 25 basis points to 2.50%. ⁽⁴⁾

Six days later, the US Federal Reserve voted 12-0 to lift its target range to 3.75%-4.00% ⁽⁵⁾, the Fed’s first rate hike since 2023.

Short-term yields track policy rates closely. Longer-term yields reflect where investors expect rates to sit over the bond’s whole life.

When markets start pricing more hikes, yields rise across every maturity, not just the shortest ones.

Record Debt Means More Bonds to Sell

The second force is supply. US federal debt passed $40 trillion on August 18, according to Treasury data ⁽³⁾, and interest costs alone are on track to exceed $1 trillion in the 2026 fiscal year. ⁽⁶⁾

Every deficit is financed by selling new bonds. Heavy borrowing can put upward pressure on yields if investors demand greater compensation to absorb additional supply, particularly when fiscal risks are also rising.

Investors locking money away for three decades may also want extra compensation for the risk that inflation or deficits turn out worse than expected.

This creates a feedback loop. Over time, higher yields raise the government’s interest bill as existing debt is refinanced, potentially widening the deficit and increasing future borrowing needs.

France Now Pays More Than Greece

Some of the rise is specific to individual countries. At its September 3 auction, France’s 10-year yield hit 4.23%, and in the market it traded above Greece’s, at 4.223% against 4.057%. ⁽¹⁾

That is a striking reversal from the eurozone debt crisis era, when Greek government debt traded at much higher yields and Greece received international financial assistance.

Both countries share the same central bank, so the gap does not come from policy rates. It reflects differences in how investors price each government’s fiscal outlook, political risk and other market factors.

France ran a deficit of 5.1% of GDP in 2025, and its debt reached 117.5% of GDP at the end of the first quarter of 2026. ⁽⁷⁾ Its government is now negotiating spending cuts for the 2027 budget. ⁽¹⁾

Yields Travel Across Borders

Bond markets are linked. Large investors compare yields globally, so a sharp move in one major market pushes others to adjust.

On September 23, the 10-year Treasury yield jumped from 4.96% to 5.11% ⁽³⁾ after a stronger-than-expected purchasing managers’ survey revived inflation concerns. It was the sharpest daily rise since the April 2025 “Liberation Day” market rout. ⁽²⁾

Japanese yields followed the next morning. A weaker yen added to the pressure, since it raises import costs and domestic prices. ⁽²⁾

What It Means for Borrowing in the UAE

The UAE dirham is pegged to the US dollar, so the Central Bank of the UAE typically adjusts its policy rate in line with the Federal Reserve.

On September 16, the CBUAE announced a 25-basis-point increase in its base rate to 3.90%, effective September 17, following the Fed’s move the same day. ⁽⁸⁾

Changes in the CBUAE’s policy rate can feed through to EIBOR, which is used as a benchmark for many UAE mortgages and other loans. Borrowers on variable-rate mortgages feel the change first, while savers can see deposit rates follow the base rate upward.

Daman’s earlier look at the dirham’s dollar peg explains why the CBUAE has little room to diverge.

Two Layers Behind One Move

Much of the global rise in yields comes from two layers. The first is policy: central banks lifting rates against energy-driven inflation, a layer that tends to move with each new inflation print.

The second is debt: record borrowing that asks investors to hold more government bonds for longer. That layer tends to persist as long as deficits stay large.

Sources: ⁽¹⁾ AFP, ⁽²⁾ Reuters, ⁽³⁾ U.S. Department of the Treasury, ⁽⁴⁾ European Central Bank, ⁽⁵⁾ Federal Reserve, ⁽⁶⁾ Committee for a Responsible Federal Budget, ⁽⁷⁾ INSEE, ⁽⁸⁾ Central Bank of the UAE