Why Are Interest Rates Rising?

Full transcript:

Hello and welcome to this month’s market update for September 2026. My name is Steve Latham. I am the chief investment officer for Bernicke Wealth Management, and today we’re going to be talking about the ever increasing yield picture across the world. It’s not just the United States that is seeing their yields go up throughout this year. We’re seeing that in many developed nations throughout the world.

And we’re going to look at some of the reasons why that is potentially a negative thing. But there could also be signs as to why that would be a positive thing. So let’s dive right into it. So the first chart we have here is just a picture of what the yields have been doing over the past ten years.

A Decade of Rising Global Bond Yields

And if we look at this from basically 2015, so about ten years ago all the way to present day, we can see that of course with Covid in there, the general trend has been upwards from bottom left to upper right. And what we see is for developed countries, the United Kingdom, United States, France and Japan, and those ten year government bond yields, which is a pretty decent barometer of the overall yield profile for government bonds, has been increasing, especially over the last year.

And so what we’re looking at here because of these increase in yields are a couple reasons as to why the yields are increasing. Now. More often than not, people contain higher yields with problems. If yields are going up perhaps that means spending is out of control. There’s fiscal profligacy. As far as what is happening for stimulus within each country is how much governments are spending on projects to support, educational efforts or any other things that they’re doing within their government profiles.

The Negative Case: Debt and Fiscal Spending

There’s a lot that could be occurring as a result of what that government spending is doing, not just in the United States, of course, but overseas. But we’re also looking at what are those potential opportunities associated with yields as well. So let’s start with some of the negatives. What could be happening here that would be driving yields higher.

That would be causing a problem.

Well what I have here is the percent of debt relative to GDP for those four countries that we just mentioned. So France, Japan, United Kingdom and the United States, and what we see going back to the 1950s is a pretty clear trend, that debt is increasing faster than the growth of the country’s gross domestic product.

And if you’re not familiar, gross domestic product or GDP, is just a simple way to measure the output of what a country produces year over year. So if you have a positive GDP, that means your country’s economy is generally growing. So if you take your debt divided by the GDP, that gives you a good barometer of how much spending is going into increasing that growth.

And so again, as we can see, that trend is going up. And so if debt is out spending or increasing faster than GDP, that is generally unsustainable. And what happens in those scenarios is the cost for those countries to borrow or issue more debt becomes more expensive and that translates into higher yields. So the more debt that you have outstanding, the more investors are going to demand higher interest rates to compensate for that risk that you are spending too much as a country.

And so when we see interest rates increase, that goes back to our the government spending too much money on entitlement programs. Are they not caring about balanced budgets? Are there other guardrails that are just being completely ignored through, again, government action, both within the government or supranational government entities? So there’s a lot of different things that could be occurring to increase the amount of concern investors have around what governments are doing as far as spending is concerned.

And one of the easiest ways to view that through is through yields. So as yields increase on government debt, that could be seen as a negative for government spending. Basically saying, hey, governments, stop spending so much money, get your budgets in check and let’s bring these ratios down. And currently, the United States has a debt to GDP ratio of around 120%.

So that means for every dollar of GDP that we create, we have $1.20 of debt outstanding. And that’s of course increased every year really since the mid 1950s.

The Positive Case: Growth-Driven Yields

Now let’s go to the bright side. If we’re an optimist, what are we going to look at to suggest higher yields are a product of a rosier future. What are the things that could cause yields to increase that are actually good for the economy?

Well, one of those things is just outright growth. If growth is increasing faster than expected, that means you as an investor are going to be selling your safe haven assets like bonds and investing in the stock market where there’s additional future growth potential. So if your bond is only yielding you 4%, but you think you can get 8% in the stock market, you’re going to go sell your bond and you’re going to go buy the stock market.

It’s a very generic example, but it’s a simple way to conceptualize why you would see an increase in yields as a result of potential future growth exceeding forecasts. And so what we have here in front of us is a J.P. Morgan chart that shows what are the contributors to our GDP growth going back to 2023. And on the left hand side here, we can see that in 2023, 24 and 25.

The blue box is what consumption comprises of GDP. So said differently. The consumer is a very large part of GDP growth. And we’ve talked about this in the past. About 70% of total growth in our country’s GDP relates back to the consumer. We can see that up here, where the average between 2000 and 2025 is right around that 70%.

But what we’ve seen so far this year, whenever we’re looking at it on a quarterly basis, down here on the right hand side is, yes, consumption is a large part of our growth, but we’re also starting to see a significant increase in business fixed investment, which is this gray bar. So the last couple quarters and you can see this going back really the last two years, if we expand the chart, fixed business investment has increased substantially as a contributor to GDP growth.

Well what is fixed income or fixed business investment. That is all the investment that goes in from capital expenditures for businesses into hardware and software services to help grow their companies. And in some cases, that turns into infrastructure. Well, what have we been talking about the last couple of months on these videos as it relates to infrastructure, data centers and artificial intelligence?

So that fixed business investment has been increased because of artificial intelligence. And so not only has that been an increased contributor to GDP, but a consumer that has been very resilient to a lot of the headwinds such as inflation and of course, Covid 5 or 6 years ago, we’ve seen that consumption and business investment start to exceed expectations over the last couple of years.

So again, if we’re seeing businesses and economies expand greater than what our expectations have been, well, that’s going to incentivize you to take your dollars and invest those into the stock market as opposed to buying fixed investments where your fixed investments are only going to yield you whatever that fixed interest rate is, it’s not going to grow as the economy grows.

So there’s a bit of an opportunity cost there, which is why investors might demand more on that fixed investment to justify the potential opportunity cost for missing out on an equity rally.

Global Expansion and What It Means for Investors

And again, talking about those business investments and really just overall economic investments as well. This is what we would call a heat map for overall purchasing managers index.

So in layman’s terms this is basically saying how much are each country producing from a services side and a goods side. So services being airline tickets, hotel rooms and goods being car manufacturing, any hard goods, a home improvement tools, so on and so forth. And if you combine those together and create this heat map, red just means you’re contracting.

So the economy is going in the wrong direction and green means you’re expanding. So things are going in the right direction. And this goes back to the great financial crisis in 2008. And so we can see over here on the left hand side, virtually every country in the world, both developed and emerging, were in a recession. So we see this as red.

Throughout the teens, we saw expansion across most developed countries. And then of course, we had Covid here in 2020 and now going into 25 and 26, really, with the exception of France, which is right here, you’re seeing a lot of expansion across developed and emerging countries. And if that number over here on the right hand side is above 50.

So for the United States in July we had 54.5 and in August we had 56. If it’s above 50, that means things are expanding. So what we’re seeing globally, not just in the United States but across many developed countries, is our economies are continuing to expand because we’re producing more goods, and we’re either selling those goods domestically or we’re exporting those to other countries.

So again, if these are exceeding expectations, you can have a good case made for why yields would increase, because you’re going to want to invest in the things that are growing faster than what your fixed investment is. Now, the point of all of this is to say, not every one thing here is the end all be all reason why yields are increasing.

They’re not mutually exclusive. You can absolutely have poor fiscal policy increasing yields while also having increased growth expectations increase yields as well. In our opinion, both are happening. However, we’ve seen fiscal imbalances for quite some time. This isn’t anything new. And it’s not that the markets have been ignoring it up until now, but what we are seeing is people taking a more keen focus on that piece of the puzzle, while we were also seeing growth expand more than expected.

It’s kind of a two pronged approach as to why yields could be increasing. So we believe growth expectations are elevated. We’ve seen earnings increase quite substantially for expectations not only for domestic companies but international as well. Seen economies expand greater than what we’ve expected. And we’ve seen a consumer maintain a resiliency through a number of headwinds that we’ve experienced over the last 5 or 6 years.

So it’s perfectly reasonable to expect yields to be higher than average, especially coming off effectively a zero interest rate policy just a few short years ago. So all in all, higher yields aren’t necessarily a bad thing. Yes, they can be painful in certain circumstances, especially if you’re out there shopping for a mortgage. But it’s something we have to keep an eye on because one of those things is not the end all be all for why yields are increasing.

But there’s a multitude of factors for why yields are higher. So we want to take all of that into consideration and use our best judgment as to how things are going to move forward from here, not only on the fixed investment side, but of course on the equity side as well. That’s all for this month. If you have any questions, please don’t hesitate to reach out.

We’re always happy to answer them for you. Thank you very much.