US bond yields surge above 5.2%: Is the era of cheap money finally over?

The US bond market is in a severe sell-off; the 10-year US Treasury yield has surpassed 5.2%, the highest in 19 years. The 30-year yield jumped to over 5.5%. The Fed raised interest rates by 25 bps in September, while more than 70% in the market are predicting another rate hike by October. Investors, economists and fund managers are suggesting a structural macroeconomic shift; the era of cheap money is effectively over.

Dr David Kelly, Chief Strategist at JP Morgan Asset Management, wrote earlier this month that the post-GFC (Global Financial Crisis) "New Normal" of low growth and ultra-cheap money has been shattered. He states the global economy has decisively pivoted into a structurally higher real-rate regime characterised by tougher long-term debt affordability.

“The bond market is simply normalising after two decades of abnormally low interest rates,” Daniel Harenberg, lead global economist at Oxford Economics, wrote this month.

Are higher interest rates unusual?

Higher interest rates were characteristic of the great inflation era, when the US dollar shifted from the gold standard following the Vietnam War. 10-year yields ranged from 8% to over 15%. The period saw out-of-control inflation as high as over 14% in the US in 1980. This followed the great Paul Volcker Shock, which controlled the money supply and pushed rates over 20% in 1981; it resulted in a recession, but inflation was back to normal. Then followed by an era of moderation: the 1987 stock market crash, the fall of the Berlin Wall in 1989, the dotcom bubble, 9/11, wars in Iraq and Afghanistan and three recessions, where yields were controlled between roughly 4.5-6.5% and maintained moderate growth until the global financial crisis of 2008.

For a long-term investor who had been investing before the subprime crisis of 2008, high interest rates were actually quite usual. 10-year US Treasury yield over 5% was quite ordinary; if anything, the post-crisis period was quite bizarre: a zero interest rate, which fuelled the practice of carry trade, when fund managers in Japan and Europe would borrow cheaply and exchange it for US Treasuries and earn interest that was basically "free money". Then the "Negative Interest Rate Policy" era, where investors actually paid interest when borrowing from the European Central Bank and the Bank of Japan. This carry trade and cheap money ballooned global debt to over $365 trillion. Developed economies from the OECD, including the US, UK, Japan, and France, are running huge deficits; they spent more than $3.3 trillion in bond interest collectively in 2025, more than their combined defence spending and their AI buildout.

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Why are high interest rates the new normal?

The case for high interest rates rests on big deficits, sticky inflation, and restricted supply, keeping long-term yields structurally higher than after the GFC. Some strategists at JP Morgan and Goldman Sachs are already discussing 10-year yields reaching 6%. We are seeing the same oil shock which was seen after the US dollar shifted from the gold standard. The Iran war is not coming to any conclusion, nor is the global oil trade being reset to the previous phase.

The US suffers from a “total lack of fiscal discipline,” with deficits growing during both booms and busts, warned Howard Marks, co-founder of Oaktree Capital Management. US consumers are still spending money which they can't afford, with collective household debt rising over $18 trillion. Companies are issuing large amounts of debt to finance the data centres. Stock markets are slowing down, but the tech stocks are fighting the feds; the NASDAQ 100 and the Magnificent Seven are keeping the fight alive. Specifically, semiconductor stocks shrugged off rate hike and yield concerns as they rose by roughly 3%, with Anthropic's newly revealed IPO prospectus looming.

Higher yields are making bonds a real competitor for equity money and raising the discount rate on future profits, which hits richly valued growth stocks hardest. Now the Feds, who will be expecting equity pain, are unlikely to stop until the AI capex spending softens. There is weakness in the AI buildout, which is its profit model; if the spending softens, there is a real risk of a bubble pop. The reverse can also be the case that US miraculously opens the Hormuz and oil flow is restored, and the Feds slash rates, the AI growth story continues.