International | 10:30 AM
MFS Investment Management's Benoit Anne digs deeper into why US bond yields are on the rise and what it means for other assets.
By Benoit Anne, Senior Managing Director and Head of Market Insights, MFS Investment Management
- Time to get real
- Key risks on the investment team’s radar
The spike in US real rates: some good, mostly bad
Everyone is focused on the US 10-year Treasury yield, which has broken to fresh highs. At the time of writing, the 10-year yield had risen to 5.23%, its highest level since mid-2007, before the global financial crisis.[1]
But the more important story is below the surface. The rise in nominal yields has been driven almost entirely by a sharp move higher in real rates.
Some of this is encouraging. Higher real rates can reflect an upward reassessment of long-term growth potential, perhaps because of stronger productivity. There is probably some of that in the US today. Growth remains resilient, and it is hard to argue that the economy is already at the end of the cycle.
But this is not the whole story. In this case, the main driver looks less benign. Real rates are also rising because investors are demanding more compensation for policy uncertainty.
On the monetary side, the Fed’s willingness to keep policy restrictive is pushing investors to price a higher neutral rate. On the fiscal side, there might be concerns about the deficit and debt outlook, which does not help either.
That combination is keeping upward pressure on real yields. Importantly, this does not look primarily like an inflation story. Ten-year inflation break-evens have been broadly stable, suggesting that inflation risk pricing has not been the main source of the move.
The bigger message is that this is mainly a policy story. So what? If real rates are rising because of stronger growth, risk assets can live with that. If they are rising because monetary policy—as well as fiscal—risks require a higher risk premium, the implications are less friendly.
It makes the path to lower yields harder and could weaken the near-term case for duration. For now, the policy backdrop does not point to a quick normalization in rates.
In our view, higher for longer remains the base case, and we believe the duration backdrop is likely to stay challenging.
Key risks ahead on our radar
Every quarter, we survey our investment team’s portfolio managers and ask them what the key risks are on their radar. It always provides interesting insights.
For a start, there is a lot to worry about it seems. The diversity of risks is indeed impressive, ranging from concerns over cyber attacks, to private credit stress, European politics or el Nino.
But in terms of the major risks, the focus is understandably on geopolitics, inflation, rising rates, commodity prices, equity correction, and the Fed policy mistake.
Given the complexity of the global risk backdrop, we believe that an active approach to risk management may continue to play an important role for investors.
In addition, investors should also consider global diversification as part of their investment process.
Re-published with permission. Views expressed are not by association FNArena’s.
The authors’ comments, opinions and analysis are for general informational purposes only and should not be considered investment advice or a recommendation to invest in any security or to adopt any investment strategy.
This material has been prepared without taking into account any personal objectives, financial situation or needs of any specific person. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors.
This material is not intended as a complete analysis of every material fact regarding any market, industry, investment or strategy. No forecasts can be guaranteed.
Australia/New Zealand – MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537) holds an Australian financial services licence number 485343. MFS Australia is regulated by the Australian Securities and Investments Commission.
[1] Sources: Bloomberg, 10-year generic UST yields, data as of 28 Sept. 2026.
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