Why are Rates rising?
Macro
Decomposing the 10yr
We can think of the 10yr nominal yield as an aggregation of
- Inflation expectations
- Term premium
- Inflation risk premium; i.e. compensation for the UNCERTAINTY of future inflation
- Real Risk Premia; i.e. compensation for uncertainty of future real rates
- Expected short term real rates; proxied via a version of the expectations hypothesis
Note: It won’t equal the 10yr exactly due to myriad computation differences, but it’s a good proxy.
What’s driving rates this year? Back of the envelope attribution since Jan2026
- 69% of the move due to Expected short term rates
- 16% due to Expected Inflation
- 15% due to Inflation Risk Premium
- 0% due to real risk premium
Why?
- Higher expected inflation is consistent with debasement fears
- Higher short term real rates could reflect
- persistently tighter real monetary policy
- a higher equilibrium real rate associated with government dissaving or stronger private investment demand, or some combination of the two.