The yield on 10-year U.S. Treasury notes climbed from 4.18% to 5.29% between December 31, 2025, and September 30, 2026, marking a 111-basis-point surge, according to a new analysis from the National Taxpayers Union Foundation published in late 2026. The report examines what's behind this sharp increase in borrowing costs and warns that lawmakers must understand these drivers to respond effectively and improve the government's long-term budget health. While inflation expectations played a role, the analysis shows that real interest rates and risk compensation accounted for the bulk of the jump.
Using a Federal Reserve model that breaks nominal yields into four pieces—expected inflation, inflation risk premium, expected real short-term rates, and real term premium—the report finds that real-yield components drove roughly three-quarters of the 102.8-basis-point modeled increase, with inflation-related factors accounting for just 28.3 basis points. The single biggest contributor was the expected future real short rate, which rose as investors anticipated tighter Federal Reserve monetary policy and a steeper path for short-term real interest rates. More than half the total increase happened in a five-week window between late August and September 30, when yields shot up 53.2 basis points from 4.77% to 5.30%. Net interest outlays hit $1.052 trillion in fiscal year 2026, making interest payments the third-largest item in the federal budget and equal to 37% of all individual income tax collections.
The report identifies two major events correlated with the yield spikes. Federal Reserve Chairman Kevin Warsh's August 28, 2026, speech at the Jackson Hole Economic Policy Symposium signaled to markets that rate hikes were more likely, and the Fed raised its federal funds rate target by 25 basis points at its September 16 meeting. The conflict with Iran that began February 28 also corresponded with a yield increase of more than 35 basis points by the April 7 ceasefire announcement, driven by higher expected real short rates and a larger real term premium reflecting "greater general uncertainty induced by the conflict in the Middle East," according to Federal Reserve attribution cited in the report. Recent research shows that a one-percentage-point increase in the expected debt-to-GDP ratio pushes the real term premium up by two to three basis points, and a Bank for International Settlements review states that climbing yields are "partly driven by rising term premia that reflected fiscal pressures rather than inflation concerns."
The higher rates pose serious budget consequences because the Congressional Budget Office had projected the 10-year rate would average just 4.16% in the third quarter of 2026—the actual average was 4.76%, and by quarter's end it stood at 5.29%. If average interest rates across Treasury maturities stay 100 basis points above baseline projections, deficits will swell by $3.8 trillion over fiscal years 2027 to 2036, or $1.9 trillion if rates remain 50 basis points elevated. The government's exposure grows as it refinances maturing debt and borrows to cover $2 trillion in annual deficits, with more than $10.6 trillion of Treasury debt—about one-third of marketable debt—scheduled to mature within a year. The report concludes that Congress should rein in primary spending and shrink deficits to ease upward pressure on real interest rates and restore budget sustainability.