Yields Poised to Increase as Global Competition for Capital Endures

Arif Husain, CFA - Head of Global Fixed Income and Chief Investment Officer

Key Insights

• I continue to expect long-maturity, high-quality government bond yields to rise substantially, with the U.S. Treasury yield curve steepening notably from cash.
• The first half of 2026 is shaping up to potentially deliver blockbuster U.S. growth in my view, with nominal gross domestic product expansion possibly heading toward a 7% annualized pace.
• Volatility is likely the most mispriced asset across many markets; it is inconsistent to have relatively low implied volatility levels amid talk about bubbles.

The state of the world doesn’t change just because the calendar year does. Hence, my view on fixed income markets at the beginning of 2026 remains consistent with my perspective from 2025: I continue to expect long-maturity, high-quality government bond yields to rise substantially. 

Here are five key components of my overall forecast for this year:

1. More yield curve steepening to come

Global competition for capital will remain strong in 2026, as almost every government will continue to issue debt to finance deficits, putting upward pressure on yields. Furthermore, when factoring in the flood of artificial intelligence (AI)-related debt supply, the volume of new bond issuance is even greater than I feared last year. As a result, I expect yield curves to continue steepening in 2026, eventually reaching levels attractive enough to prompt investors to move out of cash.

While the U.S. Treasury curve has already steepened, with long-maturity yields directionally higher, I believe there is still a long way to go. Yields have moved higher, with the Bloomberg Global Aggregate Index’s yield at the end of 2025 not far from its highest level¹ since the global financial crisis. Remember, this has happened when central banks have been cutting rates—don’t get confused between what the short-term rate is doing and the direction of long-maturity yields. 

But I believe investors in U.S. Treasuries will need much more additional yield to abandon cash rates in favor of longer-maturity debt. The difference between cash rates and the 10-year Treasury yield in the U.S. was a little more than 30 basis points (bps) as of January 2, 2026.² A magnitude of about 150 to 200 bps in the spread could make bonds on the long end attractive, in my view. 

That might seem like a lot, but other countries have already established that type of yield curve. In New Zealand, the difference between cash and 10-year government note yields was more than 200 bps. In Canada, the same yield spread recently reached 120 bps. In Japan, the difference between cash and 30-year government bond yields was nearly 270 bps.³ Should the U.S. be much different? In my view, there is no reason for it to be. 

2. AI capex, bumper tax refunds to boost first-half U.S. growth

The first half of 2026 is shaping up to potentially deliver blockbuster U.S. growth in my view—I wouldn’t be surprised to see U.S. nominal gross domestic product (GDP) expansion heading toward a 7% annualized pace. The tailwind of AI capital expenditure should push the U.S. economy much of the way to that number, and then the April tax season looks set to produce the biggest refund checks seen outside the coronavirus pandemic.   

I strongly believe that the U.S. administration will do whatever it takes to have the economy humming into the 250th anniversary of the signing of the Declaration of Independence in July and the midterm elections in November. Behind the social media noise, the administration has executed a deliberate plan calibrated to achieve exactly these outcomes since Election Day 2024. Fiscal expansion, combined with the effects of the 2024–2025 Federal Reserve rate cuts, will continue to pour gasoline on the fire of improving growth.    

3. Positive environment for credit continues

The constructive growth environment is positive for risk assets, particularly credit. I expect to see credit spreads on indexes continue to tighten. Idiosyncratic credit risk will undoubtedly increase, but broadly the attractive yields available in credit will dominate in early 2026.

Emerging market debt offers a way to get more diversification in yield. Emerging market bonds have performed very well over the recent past, and I suspect this trend will continue in 2026. Compared with developed market credit with equivalent ratings, issuer-specific risk should be less of a concern in emerging markets as many are now in better fiscal positions than developed markets. U.S. policy in Latin America could also drive further credit spread compression in some emerging markets.

4. U.S. dollar has little in its favor

I still believe that the U.S. dollar will see further downside. While this is unlikely to be a straight-line depreciation, the U.S. dollar has little in its favor (other than higher yields than some high-quality government bonds). U.S. exceptionalism should continue to structurally ebb, while the premium that the greenback enjoys from being the world’s reserve currency is likely to dissipate as the country’s political leadership takes a more isolationist approach to economic policy.

5. The most mispriced asset? Volatility

Volatility is probably the most mispriced asset across a range of markets. It is simply inconsistent to have relatively low implied volatility levels amid rampant talk about bubbles. What could trigger a jump in cross-market volatility? Interest rate volatility is the most likely catalyst.

While I expect strong first-half growth driven by the U.S., eventually the party will come to an end, and the hangover will hit. Too much money will likely have been poured into the global economy, creating imbalances that need to be resolved. 

Unlike the consensus, I don’t necessarily worry about a bubble—but there are several balloons rising. By their nature, balloons are more durable than bubbles and rise further, but they do eventually pop. This would generate the volatility I expect and may also provide the opportunity for me to shed my three-year-long “grizzly bear” stance on bonds and add plenty of duration at much higher yields and with much steeper curves.  

Read More from T. Rowe Price

1 Yield to worst was 3.51% as of December 31, 2025.
2 Secured overnight financing rate was 3.87% and 10-year U.S. Treasury yield was 4.19% as of
January 2, 2026. Source for all cash and government bond yields: Bloomberg Finance L.P.
3 All data as of January 2, 2026. Cash represented by the Reserve Bank of New Zealand overnight rate for
New Zealand; Canadian overnight repo rate average for Canada; and MUTAN rate for Japan.

T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for analysis are based on information gathered by T. Rowe Price and from third‑party sources and have not been verified. Forecasts are based on subjective estimates about market environments that may never occur. Any forward‑looking statements speak only as of the date they are made. T. Rowe Price assumes no duty to, and does not undertake to, update forward‑looking statements.

Risks: Fixed income securities are subject to credit risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.

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