Inflation Is Sending Bond Yields Higher Again. Here’s Why We’re Not Worried

Key Points:

• Bond yields fell for over a month starting in early October, providing relief to investors after a sharp rise in yields during the first nine months of 2026, driven largely by the AI boom's economic demand boost.
• Yields have started rising again following an inflation surprise in the latest Consumer Price Index data, which heightened expectations of Federal Reserve interest rate hikes despite stable bond market inflation expectations.
• The two-year Treasury yield increased by over 1.2 percentage points in 2026, reaching above 4.7%, mainly due to capital-intensive AI-related investments and increased economic demand from AI spending.
• Recent declines in bond yields were influenced by disappointing AI sector earnings, concerns over neocloud companies' financial health, and fears of data center construction restrictions following Democrats' midterm wins.
• Despite the recent inflation spike, analysts remain optimistic that inflation will decrease in 2027-2028 due to fading tariff and energy impacts, subdued wage growth, and housing inflation, potentially allowing interest rates to fall unless the AI-driven economic boost intensifies further.