August 12, 2026
There has been a lot of discussion about the recent increase in the yield on the 10-year note. It has climbed from 4.1% in February to 4.6% currently. Is it being driven by inflation fears? Or are supply issues by the U. S. Treasury combined with the insatiable appetite for AI-related infrastructure funding pushing yields higher? We suggest that supply is the cause of the recent increase. The yield on the 10-year note averaged 0.6% higher than the inflation rate in the 10-year period prior to the 2020 recession. Today that real yield on the 10-year is 1.0% ( 4.6% yield on the 10-year – 3.6% inflation). The higher than average real rate seems to reflect the surging demand for long-term financing by the U.S. government and private sectors. In the world going forward a real rate of 1.0% — or higher – is probably going to become the norm.
The 0.5% increase in the yield on the 10-year note in the six months since February from 4.1% to 4.6% is impressive. But to have any idea what to expect in the months ahead it is important to understand the cause of the increase.
Certainly oil prices have risen sharply since the war began on February 28. They have been extremely volatile and have gone from about $65 per barrel prior to the war to $83 today. That increase and the corresponding volatility has probably boosted the yield on the 10-year yield slightly on a day-to-day basis.
But what really matters for the pricing of the 10-year is what investors expect to happen to inflation in the long-term. The difference between the nominal yield on the 10-year and its inflation-adjusted counterpart reflects the markets judgment of inflation expectations. That has been fluctuating in a very narrow range from 2.3-2.4% for the past couple of years. The increase in the yield on the 10-year does not seem to reflect a fear of rising inflation.
The 0.5% increase in the yield on the 10-year must, therefore, reflect the rising demand for long-term financing by the combination of the federal government and the corporate sector. The budget deficit for the federal government is projected to rise from $1.8 trillion this fiscal year to $3.1 trillion 10 years from now. That means that the Treasury will need to issue $1.8 trillion of additional debt this year to pay its bills. That need will climb to $3.1 trillion by 2036. But financing needs of roughly that magnitude have been talked about for years. None of that is new.
What is new is the insatiable appetite for financing for AI-related infrastructure, data centers in particular. Some estimates suggest firms will raise roughly $1.0 trillion for infrastructure investment this year. This is new.
That combination of public and private demand for long-term financing is putting upward pressure on the 10-year and is responsible for most if not all of the 0.5% increase in the yield on the 10-year in the past six months.
Prior to the recession the yield on the 10-year averaged about 0.6% higher than the inflation rate. Today the 10-year is averaging about 1.0% higher than the inflation rate because of the combination of public and private sector demand for long-term capital.
The nominal yield on the 10-year is 4.6%, presumably consisting of inflation of 3.6% and a real rate of 1.0%. Going forward it is hard to see inflation coming down much until the war ends. But who knows when that will be. While many hope it will end quickly, each time an agreement and cease-fire seem certain the deal falls apart.
Meanwhile financing needs are unlikely to shrink any time soon and may even increase. The AI buildout is in its infancy and as more and more firms join the infrastructure buildout and potential AI users spend on the necessary software, the capital requirements could continue to climb. Thus, the 1.0% real rate might also rise farther.
For this reason we think the nominal yield on the 10-year should remain about 4.6% at the end of this year.
Stephen Slifer
NumberNomics
Charleston, S.C.
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