Businesses could pay a price for bond yield spikes

In late September, the yield on a 10-year US Treasury bond leapt above 5.25%, the highest since 2002, while the 30-year yield surged to a rate last seen in 2004.

Bond yields are rising in the US and across the globe, thanks to elevated government borrowing and public debt levels, rising inflation, and geopolitical tensions. In the UK, Germany and France, ten-year yields have recently risen to levels not seen since the days of the Great Financial Crisis. 

Bond yields matter. When they rise, finances become tighter for governments, businesses, and consumers. Government bonds provide a benchmark for the price of money in the economy, and when yields rise, borrowing becomes more expensive for everyone. 

In a time of serious economic volatility, companies need to understand why bond yields are rising so sharply, what it means for their finances, and what might happen next.

Government bonds: a not-so-safe haven?

Government bonds are traditionally considered the market’s safe haven, because governments don’t tend to go bust or renege on their debts. Long-term treasury bonds from the US and larger European economies are usually prized as dependable, low-risk hedges in diverse investment portfolios. 

But recent events have made investors think twice and their caution is reflected in rising yields, a sign of both slowing demand and increased economic volatility. Investors are demanding greater compensation for what they see as the growing risk of lending governments money.   

To be clear, rising yields aren’t always the result of economic retrenchment. Growth can drive rises in bond yields too, by creating inflationary pressure and raising the likelihood of interest rate hikes. That might be happening to some extent here. European economies are proving surprisingly resilient in difficult circumstances and reports from the US suggest a surge in business activity.

But a more obvious factor is the energy price shock caused by the US-Iran war. The price of a barrel of Brent Crude oil hit USD 108 again in September after President Trump rejected an Iranian proposal to reopen the Strait of Hormuz. Oil price pressures ripple through economies by raising the costs of transport, food and other goods. Investors demand higher bond yields to compensate for inflation as rising prices eat away at the value of fixed assets.

“Bond markets started the year expecting rate cuts. Instead, they’re confronting the prospect of rates staying higher for longer,” says Dana Bodnar, Senior Economist at Atradius. “That shift in expectations, combined with persistent inflation and growing fiscal concerns in the US, has helped push bond yields sharply higher.”

Paying the premium

Investors on both sides of the Atlantic are also grappling with worries around growing government deficits. The US national debt hit USD 40 trillion for the first time in August, inflated by a foreign war with no clear off-ramp. Major defence and infrastructure spending commitments drove German government debt up by EUR 144 billion in 2025. France’s debt is forecast to hit a near 50-year high this year.

Governments borrow money to fill fiscal gaps, increasing the supply of bonds on the market and pushing prices down. As prices fall, yields rise. 

Right now, it feels like a perfect storm for bond yields. Uncertainty about inflation and interest rates, high government borrowing and geopolitical tensions all work in the direction of increasing the term premium on 10- and 30-year bonds, as investors demand greater compensation for holding longer-dated debt.

Borrowing costs hit businesses

But the impact of rising yields is not just a concern for investors. Government bond yields matter to businesses because they provide a base interest rate for the economy as a whole. When the cost of government borrowing rises, the cost of consumer and business borrowing usually follows.

“Higher bond yields filter through the economy by pushing up borrowing costs more broadly,” says Theo Smid, Senior Economist at Atradius. “Lending to the government is considered low risk. Lending to a business is riskier, so businesses typically pay a premium above government borrowing costs. When government bond yields rise, borrowing costs for consumers and businesses tend to increase as well, although the pass-through is not always immediate or complete.”

When borrowing becomes more expensive, businesses may delay or cancel investment in new equipment, premises, or people. Consumers facing higher mortgage, credit card or loan payments are less likely to pursue big ticket purchases, adding to pressure on consumer-facing sectors. Finally, governments paying more to service debt have less money to spend on infrastructure projects, public services, or tax cuts to boost economic growth. 

“Many businesses rely on borrowing to finance investment, and higher interest costs can put pressure on profit margins across industries and sectors,” says Smid. “Reduced consumer spending tends to affect retailers first before filtering through wholesalers, logistics providers, and manufacturers. When governments curb spending to contain budget deficits or higher debt-servicing costs, infrastructure and construction companies can be affected, along with their supply chains.”

Rising bond yields can also create a vicious circle, as higher government borrowing costs and growing deficits lead to more borrowing that pushes bond yields up further. This is not inevitable if governments respond with tax rises or spending cuts, but these measures come with their own political and economic pitfalls.

What’s next for bond yields?

If government bond yields are rising because of economic and geopolitical uncertainty, a return to more stable conditions should see them start to fall.

Unfortunately, stability seems some way off. President Trump's rejection of recent Iranian overtures suggests Washington is in no mood for compromise at any cost, despite upcoming midterm elections and the war’s unpopularity with US voters. It seems increasingly likely that the Strait of Hormuz will stay closed well into 2027.

With the conflict exerting upward pressure on inflation, markets are increasingly pricing in further monetary tightening by the US Federal Reserve, European Central Bank, and the Bank of England. 

Until these trends are reversed, bond yields are likely to remain elevated. Governments are borrowing heavily at a time when demand for capital is also being boosted by the global AI investment boom. The resulting competition for investor funds is helping to keep long-term interest rates high. 

Companies, in the short term, are likely to be affected by tightening credit standards and rising interest rates. At the same time, however, the overall financing environment is expected to be more stable and predictable than during the previous monetary tightening cycle of 2022 to 2023.

Nevertheless, businesses should still prepare for the possibility of missed or delayed payments and even bankruptcies. If they don’t already do so, they should monitor buyers for signs of financial distress as higher bond yields feed through interest costs and put pressure on profit margins.

The price of a 10-year US Treasury or German Bund yield may seem far removed from the real economy, but these rising numbers are a flashing red warning light for business borrowing costs. Persistent inflation, heavy government borrowing, and heightened uncertainty are keeping upward pressure on long-term yields, and the near-term outlook suggests little relief.

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