The core logic behind the rise in long-term US Treasury yields: driven by global funding shortages, dispelling the misconception that inflation is the primary driver.
2026-08-18 19:12:57
Recently, yields on long-term US Treasury bonds have continued to rise strongly, with the 10-year yield approaching 4.74% and the 30-year yield breaking through 5.3%, reaching a level not seen in nearly two decades. The prevailing short-term market narrative habitually attributes this round of long-term yield increases to the rebound in international oil prices and the expectation of inflation recovery triggered by escalating geopolitical conflicts, believing that rising inflation is the core driving force suppressing the bond market and pushing up yields. 
This article attempts to break free from this habitual framework, starting from the analysis of yield structure, global capital flows, and the underlying supply and demand logic of the macroeconomy, to propose a deeper new perspective—the true driving force behind this round of long-term yield increases is not inflation, but a systemic shortage of globally available loanable funds. The normalization of Japanese interest rates ending the supply of cheap dollars and global central banks' quantitative tightening to repair term premiums constitute the structural main theme; while the much-discussed AI logic is a key supporting argument for disproving the inflation hypothesis and explaining the divergence between "high real interest rates + low inflation expectations." This round of increases in long-term US Treasury yields is not a cyclical market driven by inflation, but a structural trend caused by the imbalance between global capital supply and demand and a systemic shortage of loanable funds. The normalization of Japanese interest rates ending the supply of cheap dollars globally and global central banks' quantitative tightening to repair term premiums are the two core pillars of the market trend; while the much-discussed AI logic is not the core driver of yield increases, but a key supporting logic for disproving the "inflation hypothesis" and explaining the low inflation center. The resonance of these two factors constructs a new pricing system for the current US Treasury market. I. Core Driver 1: Japanese Interest Rate Normalization Leads to Systemic Contraction in Global Cheap Fund Supply For the past two decades, yen carry trades and overseas asset allocation by Japanese institutions have been the most stable marginal incremental funds in the global US Treasury market, and a core structural force that has long suppressed long-term US Treasury yields and lowered global funding costs. However, the Bank of Japan's current policy normalization process is completely reversing this long-standing funding pattern, directly triggering a global funding shortage from the supply side. This is the core underlying logic of the current rise in long-term US Treasury yields. Currently, the yield on 10-year Japanese government bonds has climbed to 2.94%-2.95%, a near 30-year high, with the policy rate firmly above 1%. The market generally expects the Bank of Japan to continue raising interest rates in 2026, making the path to monetary policy normalization clear and irreversible. Charu Chanana, Chief Investment Strategist at Saxo Bank, points out that the significant rise in Japanese government bond yields has dramatically improved the cost-effectiveness and competitiveness of domestic fixed-income assets, completely changing the global asset allocation logic of Japanese institutions. As the largest overseas holders of US Treasury bonds, Japanese life insurance companies and pension funds are core buyers in the long-term US Treasury market. For decades, these institutions have allocated 35%-40% of their overseas assets to ultra-long-term US Treasury bonds, profiting from stable interest rate differentials in the low-interest-rate environment of the yen and providing a continuous stream of incremental funds to the US Treasury market. However, with the recovery of Japanese bond yields, the narrowing of the Japan-US interest rate differential, and fluctuations in exchange rate hedging costs, the relative attractiveness of ultra-long-term US Treasury bonds to Japanese investors has significantly diminished. More importantly, the Bank of Japan's quantitative easing (QT) approach has further amplified the capital outflow effect. Unlike the Federal Reserve's clear policy guidance, the Bank of Japan's tapering of bond purchases is more flexible and uncertain, directly pushing up volatility in domestic long-term interest rates and forcing large domestic asset management institutions to restart global asset rebalancing. Several Japanese financial institutions have explicitly designated fiscal year 2026 as the "first year of asset allocation rebalancing," planning to reduce their US Treasury holdings to below 30%, initiating a continuous process of reducing US Treasury holdings and bringing funds back to Japan. From a trading perspective, the reversal of traditional yen carry trades is exacerbating the tight funding situation. For the past two decades, the mainstream trading model has been "borrowing low-interest yen and allocating to high-interest US Treasuries," a mechanism that has been the most stable marginal support for the US Treasury market. Currently, the Japan-US interest rate differential has narrowed to within 300 basis points, significantly compressing the safe-haven returns of carry trades, prompting hedge funds and other trading-oriented funds to initiate concentrated liquidation. Deutsche Bank warns that if the Bank of Japan raises interest rates to above 1.5% in the second half of 2026, it will trigger a large-scale repatriation of yen across borders, potentially creating a temporary "buyer vacuum" in the long-term US Treasury market and further pushing up yield levels. JPMorgan Chase explicitly concludes that the continuous inflow of Japanese funds over the past decades has been a key external force suppressing long-term US Treasury yields and lowering global term premiums; however, this core supporting force has now completely reversed, becoming a persistent structural driver of rising global funding costs and US Treasury yields. II. Core Driver Two: Global Central Banks' QE Implementation and the Resurgence of Term Premiums Reshaping Bond Market Pricing If the repatriation of Japanese funds was the core of the contraction in external funding supply, then the market structure reshaping brought about by global central bank quantitative tightening is the core internal support for the rise in long-term US Treasury yields. This further exacerbates the imbalance between supply and demand in the US Treasury market, completely ending the decade-long "central bank bailout" easing pattern. Over the past decade, continuous quantitative easing (QE) by global central banks has been the core anchor for bond market pricing. Large-scale bond purchases by major central banks such as the Federal Reserve and the Bank of Japan directly compressed the term premium of US Treasury bonds to zero or even negative values for a long period, masking the true supply and demand relationship of funds in the market and artificially suppressing the central level of long-term yields. At that time, central banks were the largest marginal buyers in the US Treasury market, and ample bailout funds offset the supply pressure of fiscal bond issuance, eliminating the need for the market to bear a risk premium for holding long-term bonds. Currently, the global monetary policy cycle has completely reversed, with quantitative tightening becoming the mainstream trend. The Federal Reserve continues its quantitative easing (QT) program, with hundreds of billions of dollars in Treasury bonds maturing each month and not being renewed, actively withdrawing from the market's buying side. Global central banks' annual bond purchases have shifted from a peak of over $2 trillion to a net selling position. This signifies the complete withdrawal of the "safety net" that masked the funding shortage over the past decade, and the full restoration of the market-based pricing mechanism in the US Treasury market. The continued rise in the term premium is a direct reflection of the funding shortage. The term premium, representing the risk compensation investors require for holding long-term Treasury bonds, has returned from negative to positive values. This is not simply a fluctuation in market sentiment, but an inevitable result of a reversal in the supply and demand of funds. With central banks no longer providing unlimited bailouts and overseas incremental funds continuing to withdraw, the market must match the pressure of Treasury bond supply with scarce market liquidity through higher yields. It is important to clarify that the expansion of the US fiscal deficit merely amplifies the supply pressure, not the core cause. Even excluding fiscal factors, the systemic reduction in loanable funds resulting from global central bank QT and cross-border capital inflows will still drive the term premium recovery and the rise in long-term yields. The market's long-standing attribution of rising yields to inflation and fiscal policy essentially ignores the permanent changes in the global capital structure. III. Supporting Argument: The Dual Effect of AI Falsifies the Mainstream Hypothesis of Inflation Driving Yields The biggest flaw in the current mainstream hypothesis of "inflation driving rising yields" lies in its inability to explain the market characteristic of "sharply rising yields but stable inflation expectations." The much-discussed macroeconomic effects of AI are not the core driver of rising yields, but rather a key supporting argument that refutes the inflation narrative, explains the low inflation center, and corroborates the logic of capital shortages, perfectly fitting the current market structure of "high real interest rates and low inflation premiums." In the short term, the rapid development of the AI industry has further exacerbated the market's capital shortage. Global tech giants such as Alphabet, Amazon, Microsoft, and Oracle have launched a massive wave of bond issuances to expand data centers, develop high-end chips, and deploy AI computing infrastructure. Bloomberg reports that the massive borrowing by AI-related companies is triggering a market-wide battle for capital. Vivek Paul, Chief Investment Strategist at BlackRock UK, also stated that the explosive growth in AI infrastructure construction has significantly exacerbated global capital scarcity. The excessive demand for funds from the real economy is further pushing up real interest rates, resonating with the core hypothesis of capital shortage discussed in this article. From a long-term perspective, the structural deflationary effect of AI directly refutes the market narrative of a sustained inflationary recovery. The mainstream market simply defines AI as "productivity improvement and a boon to economic growth," but ignores its extreme income redistribution effect. Compared to the Industrial Revolution and the Information Technology Revolution, AI technology exhibits a strong "winner-takes-all" characteristic: tech giants and top technical talent monopolize the vast majority of incremental wealth, while a large number of mid-skilled white-collar and service industry jobs are being replaced by algorithms on a large scale. This substitution effect will exacerbate the K-shaped polarization of the labor market, with the income of low- and middle-income groups continuing to decline. This group represents the highest marginal propensity to consume, and their shrinking purchasing power will directly suppress total social consumption demand, creating demand-driven structural deflationary pressure. Japan's "lost three decades" have proven that technological progress is not a sufficient condition for inflation. Worsening income inequality and a slowing consumer spending engine will lock in a low inflation level for the long term. In summary, the AI logic fully explains the current inflation pricing characteristics: in the short term, the surge in AI capital expenditure grabs market funds, exacerbating the shortage of funds and pushing up real interest rates; in the long term, AI job substitution and income differentiation suppress aggregate demand and lock in low inflation expectations. This directly proves that the core of this round of long-term yield increases is the rise in real interest rates caused by the imbalance between supply and demand for funds, rather than the inflation recovery perceived by the market. Anshul Pradhan, head of US interest rate research at Barclays, also explicitly attributed the core of the long-term US Treasury sell-off to changes in the structure of Treasury bond buyers and the imbalance between supply and demand for funds, with inflation being only a secondary disturbance factor. IV. Market Essence Review and Key Observation Dimensions for the Future In summary, the structural rise in long-term US Treasury yields in this round is the result of the resonance between the core force of fund shortage and the auxiliary force of deflationary constraints, completely different from traditional inflation-driven cyclical market trends. The normalization of Japanese interest rates triggered a global inflow of cheap capital, and global central bank QT (Quick Transfer) pushed for the correction of term premiums, forming the core fundamentals of the market trend and driving a sustained rise in real interest rates. Meanwhile, the structural deflationary effect of AI suppressed the upward potential of inflation expectations, ultimately creating a unique market pattern of "high yields and low inflation expectations." This logical framework also completely overturns the market's short-term inflation narrative: factors such as oil prices and geopolitical conflicts are merely temporary and cyclical disturbances, unable to support a sustained rise in long-term yields. The structural contradiction of a global shortage of loanable funds is the core theme of this market trend. Looking ahead, there is no need to over-focus on short-term inflation data fluctuations. By tracking three key structural variables, one can grasp the trend of the central level of long-term US Treasury yields: First, the pace of the Bank of Japan's interest rate hikes and the extent to which Japanese institutions reduce their holdings of US Treasuries and the capital inflows are the core variables of external capital supply; second, the pace of global central bank QT, and whether the term premium can be stably maintained in a positive range, determine the bottom of the central level of long-term yields; third, the inflection point of capital expenditure in the AI industry and the degree to which the employment substitution effect is realized determine the long-term fluctuation range of the inflation center and real interest rates. In the short term, if the pace of capital repatriation from Japan slows down and AI capital expenditure cools down in stages, the yield on long-term US Treasury bonds may see a phased recovery; however, in the medium to long term, the era of cheap global funds has ended, and the structural pattern of tight funds is difficult to reverse, and the central level of long-term US Treasury bond yields will be systematically higher than the level of the past decade.
This article attempts to break free from this habitual framework, starting from the analysis of yield structure, global capital flows, and the underlying supply and demand logic of the macroeconomy, to propose a deeper new perspective—the true driving force behind this round of long-term yield increases is not inflation, but a systemic shortage of globally available loanable funds. The normalization of Japanese interest rates ending the supply of cheap dollars and global central banks' quantitative tightening to repair term premiums constitute the structural main theme; while the much-discussed AI logic is a key supporting argument for disproving the inflation hypothesis and explaining the divergence between "high real interest rates + low inflation expectations." This round of increases in long-term US Treasury yields is not a cyclical market driven by inflation, but a structural trend caused by the imbalance between global capital supply and demand and a systemic shortage of loanable funds. The normalization of Japanese interest rates ending the supply of cheap dollars globally and global central banks' quantitative tightening to repair term premiums are the two core pillars of the market trend; while the much-discussed AI logic is not the core driver of yield increases, but a key supporting logic for disproving the "inflation hypothesis" and explaining the low inflation center. The resonance of these two factors constructs a new pricing system for the current US Treasury market. I. Core Driver 1: Japanese Interest Rate Normalization Leads to Systemic Contraction in Global Cheap Fund Supply For the past two decades, yen carry trades and overseas asset allocation by Japanese institutions have been the most stable marginal incremental funds in the global US Treasury market, and a core structural force that has long suppressed long-term US Treasury yields and lowered global funding costs. However, the Bank of Japan's current policy normalization process is completely reversing this long-standing funding pattern, directly triggering a global funding shortage from the supply side. This is the core underlying logic of the current rise in long-term US Treasury yields. Currently, the yield on 10-year Japanese government bonds has climbed to 2.94%-2.95%, a near 30-year high, with the policy rate firmly above 1%. The market generally expects the Bank of Japan to continue raising interest rates in 2026, making the path to monetary policy normalization clear and irreversible. Charu Chanana, Chief Investment Strategist at Saxo Bank, points out that the significant rise in Japanese government bond yields has dramatically improved the cost-effectiveness and competitiveness of domestic fixed-income assets, completely changing the global asset allocation logic of Japanese institutions. As the largest overseas holders of US Treasury bonds, Japanese life insurance companies and pension funds are core buyers in the long-term US Treasury market. For decades, these institutions have allocated 35%-40% of their overseas assets to ultra-long-term US Treasury bonds, profiting from stable interest rate differentials in the low-interest-rate environment of the yen and providing a continuous stream of incremental funds to the US Treasury market. However, with the recovery of Japanese bond yields, the narrowing of the Japan-US interest rate differential, and fluctuations in exchange rate hedging costs, the relative attractiveness of ultra-long-term US Treasury bonds to Japanese investors has significantly diminished. More importantly, the Bank of Japan's quantitative easing (QT) approach has further amplified the capital outflow effect. Unlike the Federal Reserve's clear policy guidance, the Bank of Japan's tapering of bond purchases is more flexible and uncertain, directly pushing up volatility in domestic long-term interest rates and forcing large domestic asset management institutions to restart global asset rebalancing. Several Japanese financial institutions have explicitly designated fiscal year 2026 as the "first year of asset allocation rebalancing," planning to reduce their US Treasury holdings to below 30%, initiating a continuous process of reducing US Treasury holdings and bringing funds back to Japan. From a trading perspective, the reversal of traditional yen carry trades is exacerbating the tight funding situation. For the past two decades, the mainstream trading model has been "borrowing low-interest yen and allocating to high-interest US Treasuries," a mechanism that has been the most stable marginal support for the US Treasury market. Currently, the Japan-US interest rate differential has narrowed to within 300 basis points, significantly compressing the safe-haven returns of carry trades, prompting hedge funds and other trading-oriented funds to initiate concentrated liquidation. Deutsche Bank warns that if the Bank of Japan raises interest rates to above 1.5% in the second half of 2026, it will trigger a large-scale repatriation of yen across borders, potentially creating a temporary "buyer vacuum" in the long-term US Treasury market and further pushing up yield levels. JPMorgan Chase explicitly concludes that the continuous inflow of Japanese funds over the past decades has been a key external force suppressing long-term US Treasury yields and lowering global term premiums; however, this core supporting force has now completely reversed, becoming a persistent structural driver of rising global funding costs and US Treasury yields. II. Core Driver Two: Global Central Banks' QE Implementation and the Resurgence of Term Premiums Reshaping Bond Market Pricing If the repatriation of Japanese funds was the core of the contraction in external funding supply, then the market structure reshaping brought about by global central bank quantitative tightening is the core internal support for the rise in long-term US Treasury yields. This further exacerbates the imbalance between supply and demand in the US Treasury market, completely ending the decade-long "central bank bailout" easing pattern. Over the past decade, continuous quantitative easing (QE) by global central banks has been the core anchor for bond market pricing. Large-scale bond purchases by major central banks such as the Federal Reserve and the Bank of Japan directly compressed the term premium of US Treasury bonds to zero or even negative values for a long period, masking the true supply and demand relationship of funds in the market and artificially suppressing the central level of long-term yields. At that time, central banks were the largest marginal buyers in the US Treasury market, and ample bailout funds offset the supply pressure of fiscal bond issuance, eliminating the need for the market to bear a risk premium for holding long-term bonds. Currently, the global monetary policy cycle has completely reversed, with quantitative tightening becoming the mainstream trend. The Federal Reserve continues its quantitative easing (QT) program, with hundreds of billions of dollars in Treasury bonds maturing each month and not being renewed, actively withdrawing from the market's buying side. Global central banks' annual bond purchases have shifted from a peak of over $2 trillion to a net selling position. This signifies the complete withdrawal of the "safety net" that masked the funding shortage over the past decade, and the full restoration of the market-based pricing mechanism in the US Treasury market. The continued rise in the term premium is a direct reflection of the funding shortage. The term premium, representing the risk compensation investors require for holding long-term Treasury bonds, has returned from negative to positive values. This is not simply a fluctuation in market sentiment, but an inevitable result of a reversal in the supply and demand of funds. With central banks no longer providing unlimited bailouts and overseas incremental funds continuing to withdraw, the market must match the pressure of Treasury bond supply with scarce market liquidity through higher yields. It is important to clarify that the expansion of the US fiscal deficit merely amplifies the supply pressure, not the core cause. Even excluding fiscal factors, the systemic reduction in loanable funds resulting from global central bank QT and cross-border capital inflows will still drive the term premium recovery and the rise in long-term yields. The market's long-standing attribution of rising yields to inflation and fiscal policy essentially ignores the permanent changes in the global capital structure. III. Supporting Argument: The Dual Effect of AI Falsifies the Mainstream Hypothesis of Inflation Driving Yields The biggest flaw in the current mainstream hypothesis of "inflation driving rising yields" lies in its inability to explain the market characteristic of "sharply rising yields but stable inflation expectations." The much-discussed macroeconomic effects of AI are not the core driver of rising yields, but rather a key supporting argument that refutes the inflation narrative, explains the low inflation center, and corroborates the logic of capital shortages, perfectly fitting the current market structure of "high real interest rates and low inflation premiums." In the short term, the rapid development of the AI industry has further exacerbated the market's capital shortage. Global tech giants such as Alphabet, Amazon, Microsoft, and Oracle have launched a massive wave of bond issuances to expand data centers, develop high-end chips, and deploy AI computing infrastructure. Bloomberg reports that the massive borrowing by AI-related companies is triggering a market-wide battle for capital. Vivek Paul, Chief Investment Strategist at BlackRock UK, also stated that the explosive growth in AI infrastructure construction has significantly exacerbated global capital scarcity. The excessive demand for funds from the real economy is further pushing up real interest rates, resonating with the core hypothesis of capital shortage discussed in this article. From a long-term perspective, the structural deflationary effect of AI directly refutes the market narrative of a sustained inflationary recovery. The mainstream market simply defines AI as "productivity improvement and a boon to economic growth," but ignores its extreme income redistribution effect. Compared to the Industrial Revolution and the Information Technology Revolution, AI technology exhibits a strong "winner-takes-all" characteristic: tech giants and top technical talent monopolize the vast majority of incremental wealth, while a large number of mid-skilled white-collar and service industry jobs are being replaced by algorithms on a large scale. This substitution effect will exacerbate the K-shaped polarization of the labor market, with the income of low- and middle-income groups continuing to decline. This group represents the highest marginal propensity to consume, and their shrinking purchasing power will directly suppress total social consumption demand, creating demand-driven structural deflationary pressure. Japan's "lost three decades" have proven that technological progress is not a sufficient condition for inflation. Worsening income inequality and a slowing consumer spending engine will lock in a low inflation level for the long term. In summary, the AI logic fully explains the current inflation pricing characteristics: in the short term, the surge in AI capital expenditure grabs market funds, exacerbating the shortage of funds and pushing up real interest rates; in the long term, AI job substitution and income differentiation suppress aggregate demand and lock in low inflation expectations. This directly proves that the core of this round of long-term yield increases is the rise in real interest rates caused by the imbalance between supply and demand for funds, rather than the inflation recovery perceived by the market. Anshul Pradhan, head of US interest rate research at Barclays, also explicitly attributed the core of the long-term US Treasury sell-off to changes in the structure of Treasury bond buyers and the imbalance between supply and demand for funds, with inflation being only a secondary disturbance factor. IV. Market Essence Review and Key Observation Dimensions for the Future In summary, the structural rise in long-term US Treasury yields in this round is the result of the resonance between the core force of fund shortage and the auxiliary force of deflationary constraints, completely different from traditional inflation-driven cyclical market trends. The normalization of Japanese interest rates triggered a global inflow of cheap capital, and global central bank QT (Quick Transfer) pushed for the correction of term premiums, forming the core fundamentals of the market trend and driving a sustained rise in real interest rates. Meanwhile, the structural deflationary effect of AI suppressed the upward potential of inflation expectations, ultimately creating a unique market pattern of "high yields and low inflation expectations." This logical framework also completely overturns the market's short-term inflation narrative: factors such as oil prices and geopolitical conflicts are merely temporary and cyclical disturbances, unable to support a sustained rise in long-term yields. The structural contradiction of a global shortage of loanable funds is the core theme of this market trend. Looking ahead, there is no need to over-focus on short-term inflation data fluctuations. By tracking three key structural variables, one can grasp the trend of the central level of long-term US Treasury yields: First, the pace of the Bank of Japan's interest rate hikes and the extent to which Japanese institutions reduce their holdings of US Treasuries and the capital inflows are the core variables of external capital supply; second, the pace of global central bank QT, and whether the term premium can be stably maintained in a positive range, determine the bottom of the central level of long-term yields; third, the inflection point of capital expenditure in the AI industry and the degree to which the employment substitution effect is realized determine the long-term fluctuation range of the inflation center and real interest rates. In the short term, if the pace of capital repatriation from Japan slows down and AI capital expenditure cools down in stages, the yield on long-term US Treasury bonds may see a phased recovery; however, in the medium to long term, the era of cheap global funds has ended, and the structural pattern of tight funds is difficult to reverse, and the central level of long-term US Treasury bond yields will be systematically higher than the level of the past decade.
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