The recent surge in U.S. real yields reflects the Fed's perception of upside risks to economic growth. This resilience gives the central bank more leeway to tighten financial conditions and address inflation without fearing an immediate recession, representing a key shift in its policy calculus from earlier in the year.

Bond markets are not pricing in higher long-term inflation; expectations remain anchored near the Fed's 2% target. However, the uncertainty around future inflation has widened significantly due to shocks and policy shifts. This increased risk of volatility drives the higher "term premium" demanded by investors.

The common narrative blames rising yields on government debt. However, a more significant driver is often strong nominal GDP growth. This environment is actually positive for equities, as it boosts revenues and earnings, making stocks an effective inflation hedge.

A regression analysis of the 10-year Treasury yield against nominal GDP indicates a fair value of approximately 5.8%. This suggests the bond market's push for higher yields is fundamentally justified by strong economic growth, rather than being purely speculative, as policymakers attempt to suppress yields.

The Fed's actions primarily influence short-term rates. According to Kaplan, higher long-duration bond yields (e.g., 10-year Treasury) are increasingly driven by concerns over the ballooning national deficit and the lack of a clear fiscal plan to address it. This disconnect highlights the limits of monetary policy on the longer end of the yield curve.

Interest rates are driven by nominal GDP (real growth + inflation). A strong economy combined with persistent inflation means nominal GDP is rising, increasing the "fair value" for interest rates. If the Fed doesn't keep pace, it's effectively easing policy.

The spike in long-term bond yields is overwhelmingly caused by a surge in real rates, not inflation expectations. This is driven by increased capital demand from AI-related CapEx and, more significantly, a market repricing due to a newly hawkish Federal Reserve, not a fundamental shift in the inflation outlook.

Contrary to the popular narrative focusing on debt, the main force pushing interest rates up is robust nominal GDP growth, fueled by aggressive post-pandemic fiscal policy. This era of 'fiscal dominance' changes the fundamental drivers of the bond market.

Contrary to textbook economics, the market controls interest rates. Rising long-term bond yields, driven by strong nominal GDP growth, are forcing the Federal Reserve to follow with higher policy rates, rather than the Fed leading the market.