Rising US Treasury yields are being driven by higher real yields, not inflation fears, according to Brandywine Global, Head of Macro Strategy, Paul Mielczarski.
“Stronger than expected growth, resilient consumers and broader corporate investment suggest the economy remains on firm footing, while markets are repricing a higher neutral rate. For investors, elevated real yields may make bonds increasingly attractive relative to equities,” says Mielczarski.
US 10-year Treasury yields have climbed roughly 50-basis points since the start of 2026. This is not an inflation scare. Despite the sharp rise in energy prices following the outbreak of war with Iran, market-based measures of medium-term inflation expectations have drifted lower. The entire repricing has come through real yields, with the 10-year real rate now approaching 2.5%.
“US real yields have been rising because despite multiple shocks, the US economy continues to surprise to the upside. Growth has been supported by artificial intelligence (AI) capital expenditure super-cycle and resilient consumers. The first half of 2026 has brought early signs that corporate investment is broadening beyond AI. We are also seeing tentative improvement in employment growth, which until recently has been a notable soft spot. Together these developments suggest the expansion is becoming more self-sustaining,” he adds.
The rise in real yields also reflects a structural re-assessment of the neutral real policy rate. The confidence bands around r-star estimates are enormous. But the broad contours of the debate are clear. Before the global financial crisis, the neutral real rate was generally estimated at 2%–2.5%. During the 2010s, amid secular stagnation fears, estimates collapsed toward zero. Today, the Federal Reserve (Fed) and most sell-side economists put neutral real policy rate at around 0.75%-1.00%.
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Market-implied estimates of the natural real rate have been rising and now approach 1.8%–2%. If monetary policy was genuinely restrictive as the Fed estimates suggest, we would expect to see the evidence. Instead, financial conditions are very easy, growth is decent, and credit growth is picking up. The most logical explanation is that the neutral rate is higher than official estimates suggest and the bond market is pricing this accordingly.
“So where does this leave investors? In the near term, robust growth justifies real yields staying elevated. But from a medium-term asset allocation perspective, the calculus is shifting. Real yields approaching 2.5% may represent genuinely attractive compensation for a risk-free asset. The spread between the US 10-year real yield and the S&P 500 dividend yield is now at its widest since the early 2000s. Bonds have not offered this kind of relative value versus equities in over two decades.
“The rise in real yields reflects a healthier economy and a recognition that the ultra-low neutral rates of the 2010s were an aberration, not a permanent state. That repricing has been painful for bond holders. But the upside is that bond holders can now earn a real return that is competitive with other major asset classes, and with considerably lower volatility.
“In short, rising real yields are not simply a headwind for markets; they are also a signal of a more resilient economy and a meaningful reset in the return potential of high quality bonds. For investors, fixed income once again offers compelling real income, diversification and relative value after years of unusually low yields.”
