Yields, deficits and bonds: A JPMorgan strategist answers the 3 questions markets are asking now

Investors are asking three questions that sound separate but keep showing up together: What’s going on with sovereign yields, are we concerned about U.S. debt and deficits, and do bonds still belong in portfolios? You can answer each question separately, but markets aren’t isolating them. The connective tissue is simple:

The cost of interest-rate risk is resetting as buyers, supply mix and the headlines all shift.

It’s reminiscent of an old-school “Matlock” rerun. The case isn’t solved by the loudest witness on the stand; it’s solved by the detail in the background that makes all the other testimony make sense. Let’s dive into those details for each question.

Question 1: What’s driving the move in yields?

The move in rates this year has been broad – and not confined to the U.S. As of August 31, the two-year U.S. Treasury yield is up roughly 80 basis points year to date (YTD), and the 30-year is up about 40 basis points. Long-end German Bunds and Japanese government bonds are also higher by roughly 20 to 60 basis points YTD. Growth, inflation, monetary and fiscal policy, and uncertainty/term premium all factor in, but the more prominent driver usually isn’t the loudest witness – it’s the background detail explaining why duration is being repriced.

Inflation, meanwhile, has been the loudest witness, since it can move both expected policy rates and uncertainty/term premium. Energy made that an easy storyline: The conflict in Iran disrupted roughly 20% of the world’s oil supply and about 16% of refined products, pushing prices for gasoline, jet fuel and other refined products higher with Brent crude up more than 40% YTD. That shock showed up in the data, particularly in May, when the Consumer Price Index (CPI) touched 4.2%. But the long end has offered a key clue: Long-term inflation expectations have remained anchored, and the prevailing expectation is that incremental oil supply will return in 2027 to near pre-conflict levels – making it harder to argue the move is mainly a repricing of lasting inflation.

Policy headlines have added uncertainty, too. The U.S. and Canada have been trading retaliatory measures, with Canada signaling tariffs on a roughly equivalent set of U.S. goods. The current 50% tranche covers about $20 billion of Canadian exports – less than 1% of the U.S. import base (roughly $3.5 trillion in 2025) – so the near-term macro impact is likely limited. What would be more concerning, and indeed worth watching, is escalation into categories with broader downstream effects: that is, motor vehicles and auto parts (about 12.5% of U.S. imports) and especially crude oil, for which the U.S. relies on Canada for 64.5% of crude imports. This is where the “plumbing” matters: U.S. production is skewed lighter while much of the refining system was built around heavier, higher-sulfur barrels – so the industry often blends lighter domestic crude with imported heavy crude to produce a medium-grade feedstock.

If inflation isn’t the clean driver of the long end, then the story shifts toward growth and term premium – not just “growth” as a forecast, but growth as a capital call. The global growth narrative has multiple mouths to feed, including the artificial intelligence (AI) buildout, energy transition, rearmament and defense spending. AI is the focal point, though, because hyperscalers are writing the biggest checks – the fastest – in physical infrastructure: data centers, power, cooling, networking and the overall capacity required for accelerating computing demand. Hyperscalers have issued $182 billion YTD – almost double their full-year 2025 issuance of $93 billion – and the accelerated depreciation provisions of the One Big Beautiful Bill Act only strengthen the incentive to pull forward capex. That means more financing needs, sooner.

At the same time, investors are asking for more compensation to hold long-duration bonds. Part of that is uncertainty/term premium in a world with heavier supply and more volatile narratives. And part of it reflects a shift in the background bid: The World Gold Council notes central banks have accumulated an average of 1,000 metric tons of gold annually over the past four years, versus a 500-metric-ton average over the preceding decade. Put it all together, and the connective thread becomes clearer: The buyers driving demand are more U.S.-based private investors – like pension funds, insurance companies, mutual funds and ETFs, investment firms and everyday households. These buyers tend to be more valuation- and rate-sensitive than central banks buying reserves for policy reasons, so the market often requires more yield concession to absorb supply.

Question 2: Should we be worried about debt and deficit?

If the backup in yields is the price action everyone can see, the elephant in the room we haven’t discussed is the bill – that is, U.S. debt, deficits and debt service. With the deficit approaching $2 trillion, the numbers are hard to ignore: roughly $40 trillion of debt and about $1 trillion a year in interest cost.

Cue the Destiny’s Child 1999 hit “Bills, Bills, Bills.” The hook captures what investors are really asking: Can you pay? It’s not “Will the U.S. default?” or “Can the Treasury issue another bond?” – but whether the carrying cost keeps rising to the point that it starts crowding out choices.

The irony is that the song dropped right around the only sustained period of federal budget surpluses in modern U.S. history. At the end of fiscal year 1999, total gross debt was about $5.7 trillion. Fast forward through three recessions, three major wars, significant tax changes that reduced revenues and rising healthcare costs alongside an aging population, and the headline now reads around $40 trillion of debt with roughly $1 trillion in annual debt service. Same hook, very different balance sheet.

So are we worried? The numbers are a real risk but not an automatic alarm bell. The country’s debt isn’t only “government debt.” Indeed, household, corporate and public debt all sit together on the economy’s balance sheet, and the ratio of total U.S. debt to gross domestic product across those sectors has remained relatively stable. The issue isn’t simply that debt exists – it’s what it costs to carry that debt when rates reset higher.

If policymakers sought to reduce the debt and change the trajectory, the framework is straightforward even if the politics aren’t: some combination of a marginally higher tax take, lower spending and growth. On taxes, the point isn’t that rates must rise – it’s that the U.S. starts from relatively more favorable individual and corporate tax rates than many of its G-10 peers, so even modest changes can move the needle on debt.

Regarding growth, it’s the cleaner answer that markets always prefer – that is, outgrowing the debt by expanding the denominator. That’s where AI ties back in as more than a narrative: If productivity gains translate into higher real growth and sustained earnings power, that strengthens the “we’ll grow into it” argument. We’ve already seen seven consecutive quarters of double-digit earnings growth, which is an unusually long run outside of recession-and-rebound dynamics.

Question 3: Should I still own bonds and fixed income?

And now for the portfolio question that sits downstream of all this: Should investors still own bonds and fixed income? Hesitation is understandable, because 2022 left a mark. Bonds suffered their worst year on record in 2022, with the Bloomberg U.S. Aggregate Bond Index down just over 13%, and that rewired how many investors feel about duration risk. Although the setup is different today, it’s easy to hear “yields are moving higher” and instinctively remember what happened to bond prices – like touching a hot stove once and never forgetting it.

That pain was amplified by the regime investors were coming from: After the global financial crisis but before COVID-19, the 10-year U.S. Treasury yielded an average 2.44%, versus 5.26% in the 20 years prior to 2008 (with an average effective federal funds rate of 3.98%). Carry used to be a bigger shock absorber.

Fixed income still belongs because it’s not one instrument; it’s a universe with different exposures and sensitivities than equities. Global bond markets are $160.7 trillion as of 2025, versus $157.8 trillion for global equities. Even within the S&P 500, there are 443 nonfinancial companies represented but over 7,400 bonds issued. That breadth is one reason active management can matter: According to Morningstar’s mid-year 2026 Active Passive Barometer, over the 12 months ending June 2026, active bond funds had a 52% success rate versus 38% for U.S. equity managers. That “success rate” is simply the share of active funds that not only survived but beat their average passive peer over the period.

Historically, fixed income has also helped reduce overall portfolio volatility – and that shows up in the long-run: Over the past 70 years, a diversified mix of stocks and bonds has been remarkably resilient, with the worst annualized outcome across rolling five-year periods at roughly -1%. With yields higher than they were in the low-rate decade, the income component is again a more meaningful part of the total-return equation.

The answer to the question is to be specific: What kind of bonds, for what purpose, and how much of the plan should be anchored to income and stability versus growth? That’s where the right outcome usually looks less like a dramatic portfolio pivot and more like a goals-based planning approach that aligns risk tolerance with long-term investment objectives.

Final ruling: Diversify and stick to the plan

The three questions we started with – regarding yields, deficits and bonds – were never three separate cases. They were three exhibits from the same file: a global backup in yields shaped by supply, demand and who sets the marginal price; fiscal headlines that matter because higher rates raise the cost of carry; and a portfolio decision about the role fixed income should play alongside equities.

The reason we went back to the '90s is simple: It’s a reminder that markets have always recycled the same themes – growth, inflation, policy and uncertainty – even if the cast of characters changes. There’s nothing new under the sun, and in periods when uncertainty rises, the best approach usually isn’t to time every headline – it’s to stay invested and maintain a goals-based planning approach that keeps diversification and risk tolerance aligned with long-term objectives.

View Disclosures