November 3, 2026

Does rising US Treasury yields mean the economy is good? Or is it a bad sign? How to understand interest rates you should know

The Daily Editor The Daily

Hello, this is Step!

When watching the news,

“US 10-year Treasury yields rise,” “US Treasury yields fall,” “Stock prices fall due to rising interest rates”

are phrases we often see.

But doesn’t one question come to mind here?

In the first place, is it a good thing that US Treasury yields are rising? Or is it a bad thing?

Actually, there is no fixed meaning of good or bad for rising interest rates themselves.

Sometimes interest rates rise due to expectations of a better economy, and sometimes they rise due to caution about inflation or the supply and demand of government bonds.

Even with the same “interest rate hike,” the impact on the stock market changes depending on the background.

This time, I will organize everything from the basics of US Treasury yields to how to interpret interest rate movements as simply as possible.

I am not a financial expert myself.

That is precisely why, instead of lining up difficult technical terms, I would like to confirm the basic concepts that you should know while continuing to invest, one by one.

I would be happy if this article becomes a clue for you to think about daily news and market movements in your own way.

1️⃣ What are US Treasury yields? Let’s understand the relationship with price

First, let’s grasp the basics of US Treasury yields.

US Treasuries are bonds issued by the US government to borrow funds.

By purchasing US Treasuries, investors basically receive a set interest rate and receive the face value at maturity.

What is important here is the relationship that bond prices and yields move in opposite directions.

Let’s think about it a little more concretely.

For example, suppose there is a US Treasury bond like the following.

Face value: $100
Maturity: 5 years later
Annual interest: $5

If you can purchase this bond for $90, you will receive $5 in interest every year and get $100 back at maturity.

On the other hand, even if you purchase the same bond for $110, the interest you receive is $5 per year, and the amount returned at maturity is $100.

In other words,

the cheaper you can buy it, the higher the yield on your invested amount becomes
the more expensive you buy it, the lower the yield on your invested amount becomes

is what this means.

The actual yield of a bond is calculated by including not only the interest received but also the difference between the purchase price and the amount received at maturity, as well as the time remaining until maturity.

Therefore, you cannot determine the exact yield simply by dividing interest by the purchase price.

However, it is enough to remember the following relationship for now.

When bonds are sold and prices fall, yields rise. When bonds are bought and prices rise, yields fall.

If the news reports that “U.S. Treasury yields have risen,” it basically means that U.S. Treasuries were sold and their prices fell.

So, why do investors sell and buy U.S. Treasuries?

Next, we will look at the main reasons for this.

2️⃣ Four reasons why U.S. Treasury yields rise

There are several factors behind the rise in U.S. Treasury yields.

Here are four representative ones.

① It is expected that the economy will improve

When the economy improves, it is expected that corporate earnings will grow and consumption and capital investment will become more active.

In such cases, investors may shift funds from safe US Treasuries to riskier assets like stocks.

If US Treasuries are sold, their prices fall and yields rise.

Also, if the economy is strong, it may be expected that the Federal Reserve, the central bank, will keep policy rates high or will not rush to cut rates in the future.

These outlooks can also be factors that push bond yields higher.

The rise in interest rates in this case may reflect positive expectations for the economy.

② It is expected that inflation will progress

When prices rise, the real value of money falls.

For example, goods that can be bought for $100 now might require $110 in the future.

If the interest on a bond and the money received at maturity are fixed, the more inflation progresses, the less can be bought with that money.

Therefore, when investors expect inflation to progress, they begin to demand higher yields.

As a result, bonds may be sold and yields may rise.

The rise in interest rates in this case may reflect caution regarding rising prices.

③ The FRB’s monetary policy is being considered

The FRB adjusts policy rates while monitoring the status of US prices, employment, and the economy.

The policy rate is an important interest rate for the central bank in managing monetary policy.

Generally, when the policy rate is raised, market interest rates, centered on short-term rates, also tend to rise easily.

Also, even before the policy rate is actually changed,

“Will the FRB not rush to cut rates?” “Will they raise rates at the next meeting?”

Treasury yields can move due to market expectations such as these.

In other words, interest rates are influenced not only by the policies actually decided by the Fed, but also by what the market expects future policies to be as well.

④ Changes in the issuance volume and supply-demand balance of US Treasuries

The US government issues government bonds to raise the funds necessary for fiscal spending and other purposes.

When the issuance of government bonds increases, the supply of bonds traded in the market also increases.

On the other hand, if investor demand does not increase as much, a higher yield may be required to get them to buy the government bonds.

However, an increase in government bond issuance does not necessarily mean that yields will rise.

This is because various factors are involved, such as investor demand, Fed policy, and economic outlook.

Also, the yield on long-term government bonds includes a “term premium,” which is compensation for taking on risks such as future interest rate fluctuations.

It is a slightly difficult term, but simply put, it is the additional amount investors demand for lending money over a long period.

Long-term interest rates can rise simply because this term premium increases.

3️⃣ Do stock prices fall when yields rise?

Reading this far, you might think,

“Doesn’t rising interest rates have a negative impact on stock prices?”

you might wonder.

In fact, rising interest rates can be a negative factor for the stock market.

There are two main reasons.

① Corporate financing costs rise

When interest rates rise, the costs for companies to borrow money from banks or issue corporate bonds also tend to rise.

If borrowing rates rise, the interest payment burden on companies may increase.

This can be a burden, especially for companies with high levels of debt or those planning major capital investments in the future.

② Increased awareness of stocks being overvalued

When considering the value of stocks, there is a concept of evaluating future earnings by converting them into present value.

When interest rates rise, the valuation of future earnings converted to present value tends to decrease.

In particular, companies with high expectations for future growth tend to be more susceptible to impacts on their stock price valuations.

Therefore, rising interest rates can act as a drag on stock prices.

However, there is something to keep in mind here.

A rise in interest rates does not necessarily mean that stock prices will fall.

For example, what if the economy is strong and there are high expectations for significant growth in corporate earnings?

If the expectation for improved corporate earnings is stronger than the negative impact of rising interest rates, stock prices may still rise.

In other words, what is important for the stock market is not just the fact that interest rates have risen.

Why did interest rates rise? And what impact will that rise in interest rates have on corporate earnings?

It is important to consider these two points.

4️⃣ How should you judge the market from interest rate movements?

So far, we have looked at the reasons why interest rates move and their impact on stock prices.

So, what should you actually check when U.S. Treasury yields rise?

Of course, you cannot accurately judge the market situation based solely on interest rate movements.

However, knowing the basic perspectives often used by investors makes it easier to interpret the news.

Here, we will introduce four confirmation steps often used when considering the market.

① First, compare the yields of the 2-year and 10-year bonds

There are various U.S. Treasury bonds with different maturities.

Among them, the 2-year and 10-year notes are frequently in the spotlight.

Broadly speaking,

2-year yield: Tends to reflect market expectations for the Fed’s future monetary policy
10-year yield: Reflects not only the outlook for future policy rates but also long-term economic and inflation forecasts, as well as term premiums.

These are the differences.

However, the 2-year yield does not represent only the policy rate, nor does the 10-year yield represent only the economy.

They are merely benchmarks for considering the background of interest rates.

For example, suppose the following movements occur.

Case A: Both 2-year and 10-year yields rise

This may reflect views that Fed rate cuts are being pushed further out, concerns about inflation, or the strength of the economy.

However, because supply and demand for long-term bonds or term premiums may also be rising, one cannot conclude the cause based on this alone.

Case B: Both 2-year and 10-year yields fall

This may reflect growing expectations for future rate cuts or a slowdown in inflation.

On the other hand, it could also mean that US Treasuries, as safe-haven assets, are being bought due to concerns about an economic recession.

Even with the same decline in interest rates, the meaning changes depending on the background.

Case C: 2-year yield rises, 10-year yield falls

While the Fed’s monetary tightening may be the focus in the short term, cautious views on the economic outlook may be spreading in the long term.

Case D: 2-year yield falls, 10-year yield rises

While expectations for rate cuts may rise in the short term, concerns about inflation, government bond supply and demand, or rising term premiums may be the focus in the long term.

In this way, by looking at the 2-year and 10-year notes side-by-side, you gain more clues to consider the background behind interest rate rises and falls.

The difference between the 2-year and 10-year Treasury yields is known as the “2-year/10-year spread.”

A state where the 10-year yield falls below the 2-year yield is called an “inverted yield curve,” and it is often watched as a warning sign of a recession.

However, an inverted yield curve does not necessarily mean a recession will occur.

Furthermore, the recession probability model published by the Federal Reserve Bank of New York uses the difference between the 10-year Treasury yield and the 3-month interest rate, rather than the 2-year/10-year spread.

In other words, the purpose of the analysis differs depending on which interest rate spread you look at.

2. Check the inflation situation using CPI and PCE

Next, you should check price movements.

Representative indicators include CPI and PCE.

CPI: An indicator showing price changes in goods and services purchased by consumers
PCE: An indicator showing price changes related to personal consumption. The Fed places importance on this when judging price trends

For example, what if CPI and PCE also exceed market expectations while interest rates are rising?

It is possible that the view is strengthening that inflation is not settling down easily and the Fed cannot rush to cut interest rates.

Conversely, if the inflation rate is slowing down and is also below market expectations, concerns about inflation may be easing.

However, it is important not to judge price indicators solely by the numbers themselves.

You should also check points such as what level of numbers the market expected, how they changed from the previous month, and what the underlying price trends are excluding food and energy.

Also, even if the inflation rate is falling, if it is not sufficiently close to the level targeted by the Fed, it does not necessarily mean that interest rate cuts will be implemented immediately.

3. Check the 10-year Treasury real interest rate and inflation expectations

If you want to take a deeper look, there is a way to view the 10-year Treasury yield by separating it into “real interest rates” and “inflation expectations.”

Real interest rates are interest rates that take into account the impact of price increases.

On the other hand, inflation expectations indicate how much the market anticipates future price increases.

You can check these two on the economic database ‘FRED’.

FRED is a database where you can check US economic indicators, interest rates, and more for free.

The three indicators you want to check are as follows.

1. 10-Year Real Interest Rate (DFII10)

This is the 10-year yield on US Treasury Inflation-Protected Securities (TIPS).

Unlike regular government bonds, it serves as a benchmark for interest rates that accounts for price fluctuations.

2. 10-Year Breakeven Inflation Rate (T10YIE)

This is an indicator calculated from the difference in yields between regular US Treasury bonds and inflation-indexed bonds.

It is used as a benchmark for the average inflation rate over the next 10 years that the market is pricing in.

3. 10-Year Nominal Treasury Yield (DGS10)

You can check the regular US 10-year Treasury yield, which is often reported in the news.

If you open the FRED page, you can check the trends of each indicator in a graph.

For example, suppose the following movements occur while the 10-year Treasury yield is rising.

Case A: Real interest rates rise, and inflation expectations remain mostly flat

In this case, the rise in real interest rates is more prominent than inflation expectations.

A rise in real interest rates tends to lower the valuation of future stock earnings when converted to present value, which may weigh on stock prices.

Case B: Real interest rates remain mostly flat, and inflation expectations rise

In this case, the market may be more wary of future price increases.

You should also check the impact on the Fed’s monetary policy, as well as corporate raw material and labor costs.

Case C: Both real interest rates and inflation expectations rise

In this case, both factors may be pushing nominal interest rates higher.

In this way, you can begin to see the background that is not apparent when looking only at the 10-year Treasury yield.

Conceptually, nominal interest rates can be thought of as the sum of real interest rates and inflation expectations.

However, the break-even inflation rate is not necessarily a pure prediction of future inflation itself.

This is because differences in liquidity between regular government bonds and inflation-indexed bonds, as well as compensation for inflation risk, also have an impact.

Therefore, just because inflation expectations have risen does not mean that the market is accurately predicting future prices by that exact amount.

Also, interest rate movements are influenced by the supply and demand of government bonds and term premiums.

There is no need to analyze everything in detail from the start.

First, just having the perspective of whether real interest rates are rising or inflation expectations are rising when the 10-year Treasury yield rises makes it easier to understand interest rate movements.

4. Finally, check the movements of stock prices and corporate earnings

Once you have checked this far, let’s look at the actual movements of the stock market.

You can consider the background of the market based on the combination of interest rates and stock prices.

Here are four typical patterns.

Case A: Rising Interest Rates, Rising Stock Prices

Expectations for the economy and corporate earnings are strong, and may be outweighing the negative impact of rising interest rates.

In this case, the strength of the economy may be supporting stock prices.

Case B: Rising Interest Rates, Falling Stock Prices

Concerns about inflation, monetary tightening by the Fed, or rising real interest rates may be weighing on stock prices.

It is also possible that long-term interest rates are rising due to the supply and demand of government bonds or an increase in the term premium.

Case C: Falling Interest Rates, Rising Stock Prices

Expectations that inflation is cooling and that the Fed will find it easier to cut interest rates may be supporting stock prices.

The improvement in corporate financing environments due to lower interest rates and the positive effects on stock valuations may be being taken into account.

Case D: Falling Interest Rates, Falling Stock Prices

Concerns about an economic recession or deteriorating corporate earnings may be leading to buying of US Treasuries, which are considered safe-haven assets.

In this case, it is better not to simply consider falling interest rates as a positive factor for the stock market.

However, these are merely general perspectives.

Just because interest rates and stock prices move in the same direction does not necessarily mean the cause is always the economy or inflation.

In reality, various factors such as corporate earnings, geopolitical risks, monetary policy, and investor positioning are all influencing the market simultaneously.

The important thing is not to force the market into one of these four patterns to find an answer.

It is to use them as a starting point to think, ‘Given this movement, what should I check next?’.

5️⃣ Summary

In this article, we have organized the basics of US Treasury yields and how to think about the market based on interest rate movements.

Finally, let’s review the key points.

Bond prices and yields move in opposite directions
The background of rising interest rates includes the economy, inflation, the Fed’s monetary policy, and the supply and demand of government bonds
Rising interest rates can weigh on stock prices, but they do not always lead to a decline in stock prices
Comparing 2-year and 10-year bonds provides clues to understanding the background of interest rates
Check price movements using CPI or PCE
Checking real interest rates and inflation expectations on FRED allows for a more detailed analysis of the components of rising interest rates
The combination of interest rates and stock prices serves as a hint for thinking about the market background

What I have introduced this time is a basic way of thinking often used by investors.

Of course, this is not the only way to analyze interest rate movements.

The perspective also changes depending on which indicators you prioritize and what time frame you use for judgment.

Also, you cannot accurately predict the future of the economy or stock prices based solely on interest rate movements.

What I think is important is not to make judgments based on looking at just one number.

When U.S. Treasury yields rise, think about why they rose.

Based on that, look at them in combination with other information such as prices, the Fed’s monetary policy, real interest rates, inflation expectations, stock prices, and corporate earnings.

By accumulating these basic checks, I believe you will develop the ability to think about the market in your own way without being swayed by the news.

You don’t need to understand all the indicators from the start.

Start with the yields on U.S. 2-year and 10-year Treasury notes, the CPI and PCE, and the real interest rates and inflation expectations that can be checked on FRED.

Why not try checking these areas little by little?

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