When Safe Havens Stop Being Safe

By Harral Burris

When people say the 10-year Treasury note is “rising,” they mean investors are demanding a higher return to lend money to the U.S. government for ten years. U.S. Treasuries are considered among the safest investments in the world, but ten years is a long time, and the modern world is an unsettled place.

The 10-year Treasury note yield closed at 4.69% on Friday, July 24, 2026. In this month alone, yields have surged from 4.49%, a move of 20 basis points in three weeks. This rise is rapid and unusual, and it has rattled stock and bond markets globally.

Inflation and inflation expectations. Rising inflation reduces the real, inflation-adjusted return on bonds, so investors demand higher yields to compensate. In the current environment, an oil supply shock combined with relentless tariff pressure is fueling inflation expectations and pushing bond prices down (and yields up).

A growing chance of a Federal Reserve rate hike. At the just-completed July meeting, the Fed elected to keep rates unchanged, but the odds of a September hike remain elevated. When the Fed is expected to hike, the entire yield curve shifts upward since investors won’t accept a 10-year note yielding 4% if the Fed funds rate might be 4.5% by fall. The term premium, the extra compensation investors demand for bearing the inflation risk of longer-dated bonds, has been climbing all year and still has room to run before reaching its historical peak.

The unwinding carry trade. Roughly a third of U.S. government debt is held by foreign investors, and some of that money is heading home. For years, a massive global trade has worked like this: investors borrow Japanese yen at near-zero rates, convert the yen to dollars, hedge the currency risk, and invest the proceeds in higher-yielding U.S. Treasuries. This suppressed U.S. yields by propping up demand for Treasuries. But as Japanese rates rise and the yen strengthens, the trade no longer works. In fact, it’s now running in reverse. Yen borrowers are selling U.S. bonds to repay their yen loans, adding more Treasuries to the global supply.

Deficits and debt-spiral risk. As interest rates rise, interest payments consume an ever-larger share of the federal budget. With borrowing costs approaching expected GDP growth rates, the risk of a debt spiral and fiscal crisis is growing. Investors are demanding higher returns for what they see as increased risk. The U.S. must now issue more than $2 trillion in new debt each year, and that figure keeps climbing.

The government has run a budget deficit for more than two decades, dating back to the tax cuts of the early 2000s, and continuing through the 2008 financial crisis and the 2020 pandemic. Yet even now, with inflation down from its post-COVID peak and jobless claims at their lowest level since 1969, the government continues to issue more bonds. Over time, that isn’t sustainable. As Treasury supply grows faster than demand, yields rise further. As the government rolls over maturing bonds at those higher rates, the cost of servicing the national debt climbs again, reinforcing the cycle. Absent a substantial increase in tax revenue, the U.S. risks a debt spiral in which debt-service costs crowd out essential government services, ultimately forcing some combination of higher taxes, spending cuts, or inflation that erodes the value of existing debt.

Fading safe-haven status. Global bond markets are showing signs that U.S. government securities are losing their once-undisputed status as the world’s safe haven. Historically, when markets got nervous or geopolitical risk flared, money flowed into Treasuries, pushing yields lower, but not this time. Even with two active wars and a tense South China Sea, Treasury yields are rising as the dollar weakens against a basket of foreign currencies. As rates rise and U.S. government securities issuance appears increasingly out of control, that offshore capital is at risk of being repatriated amid concerns about political instability and an out-of-control federal budget.

If rates keep rising, the stock market could come under pressure since higher rates typically act as a headwind for equities. The 10-year yield is the risk-free rate used in discounted cash flow models, so higher yields reduce the present value of future earnings and put downward pressure on the price-earnings multiples investors are willing to pay. Higher borrowing costs are also a net negative for most businesses, which face higher loan costs and lower profits. Rate-sensitive sectors like real estate, utilities, and high-growth tech tend to perform poorly in rising-rate environments.

It isn’t just Wall Street that feels the pinch. The 10-year yield is the benchmark that shapes borrowing costs across the broader economy. Mortgage rates are directly tied to it, and auto loans, corporate bonds, and other forms of credit all get more expensive as it rises. Consumers, facing higher rates on credit cards and car loans, tend to pull back on spending, putting further pressure on economic growth.

Ultimately, today’s rate surge reflects a convergence of forces: trade imbalances that have been building since COVID, energy-supply disruptions dating back to Russia’s invasion of Ukraine, sustained tariff pressure, and now war with Iran and the closing of the Strait of Hormuz.

All of these threads converge on a worst-case scenario called stagflation: stagnant economic growth, elevated unemployment, and persistently high inflation occurring simultaneously.

Stagflation is dangerous because the standard policy tools work against each other. Central banks normally fight inflation by raising interest rates, which cools growth and demand. They fight weak growth by cutting rates, which can fuel inflation. When both problems show up together, there is no simple solution. Raising rates to tame inflation could tip a fragile economy into recession, while cutting rates to support growth risks letting inflation run further out of control. The last time the nation was faced with this set of circumstances, in the 1970s, it took the better part of a decade to right the ship.

Current circumstances have several of the ingredients that produced stagflation before: an energy supply shock, tariff-driven cost pressure feeding into higher consumer prices, and a central bank that will need to keep rates high (or raise them further) even as higher borrowing costs slow the economy. Add a heavy and growing federal debt load, and the room for American policymakers to maneuver narrows further.

None of this means stagflation is inevitable. Inflation could cool if energy prices stabilize or tariff pressures ease. The labor market’s current resilience is a buffer that wasn’t available in the early 1970s. But the direction of the last few weeks is exactly the kind of pattern that shows up in the early stages of stagflation. It is worth watching closely in the months ahead.

The Federal Reserve has serious work ahead of it and a president who does not intend to let it act independently. I am old enough to remember former Fed Chair Paul Volcker, who tamed inflation after the 1970s. Kevin Warsh is no Paul Volcker, but at least around the economy and Iran, Trump’s presidency is beginning to resemble Jimmy Carter’s…

Hal is a retired investment professional with 40 years of experience in money management. The interface between geopolitics and global investments has always been his area of specialization. History has always been one of his interests and passions, in fact, that’s how Hal and Jeremi became friends in Madison, Wisconsin.