The 2026 Global Bond Sell-Off: Causes, Consequences, and Local Impacts
by Peter Fuleky, UHERO, October 12, 2026 (excerpts)
Long-term interest rates rose sharply in 2026, with the steepest climb in August and September. Yields on government bonds around the world rose to levels last seen nearly two decades ago. Because the bond market is the foundation of global finance, these rising yields have steadily increased borrowing costs for governments, businesses and households alike….
What happens next depends on why the Fed is raising rates and how much investors trust it. If central banks tighten to contain an energy-driven rise in inflation, short-term yields typically rise more than long-term ones, and the curve flattens further. A Fed that convinces investors it will keep inflation in check can even bring long-term yields down, because lenders then need less compensation for the risk of inflation eroding their returns. If investors instead doubt the Fed’s resolve or independence, they demand more for lending long, and long-term yields rise regardless of what happens to short-term rates.
How Yields Impact the Economy and Hawai’i
The US Treasury market sets the baseline cost of money for the global economy. Lenders price loans off Treasury yields of a similar maturity and add a risk premium. Auto loan rates follow 3-to-5-year yields and mortgage rates follow the 10-year yield. The average 30-year fixed mortgage rate rose above 7% in September, its highest since early 2025. (Credit card rates are tied instead to the banks’ prime rate, which moves with the Fed’s policy rate.)
In Hawai’i, where home prices are among the highest in the country, 30-year fixed mortgage rates above 7% place tight constraints on affordability and housing market activity. On a median-priced O’ahu single-family home, about $1.18 million over the past year, a buyer putting 20% down pays roughly $6,270 a month in principal and interest at 7%, against $3,970 at the 3% rates many owners locked in during 2020 and 2021. That gap of about $2,300 a month also discourages those owners from selling, which holds down the number of homes on the market. Nationally, about half of outstanding mortgages still carry rates of 4% or less, down from about two-thirds in early 2022.
(DO THE MATH: $6270/$3970=158%. The monthly payment for your new house or condo just jumped 58%.)
Figure 5: Monthly payment on a median-priced O’ahu home at mortgage rates of 3% and 7%
Higher yields reach beyond housing. Local businesses face higher costs to finance expansion or operations. State and county governments pay more to borrow for infrastructure projects, and higher debt service costs leave less tax revenue for public services.
Higher US interest rates also reach Hawai’i through the exchange rate. Although the Bank of Japan has been raising its domestic interest rates, US rates remain well above them, and that gap has kept the Japanese yen weak against the dollar. In late July the yen fell to its weakest level in about four decades. For Hawai’i, a weak yen makes travel to the islands considerably more expensive for Japanese visitors, one of the state’s most important tourism markets.
Figure 6: Japanese visitor arrivals to Hawai’i and the yen-dollar exchange rate
Over the past few years, several forces have pushed long-term yields up, some by adding to the supply of bonds and others by thinning the demand for them.
The primary driver is the volume of government debt. …
Other large borrowers face similar pressure, including Britain, France, Italy, and Japan. Japan’s government debt exceeds twice its GDP and its 10-year yield has climbed from near zero in 2021 to almost 3%. …
Japan illustrates the shift. For years the Bank of Japan held Japanese interest rates near zero, which made it attractive to borrow cheaply in yen, convert the money into dollars and buy higher-yielding US Treasuries, a strategy known as the carry trade. With Japanese yields now higher, that trade pays far less, and Japanese investors have more reason to keep their money at home. Japan remains the largest foreign holder of Treasuries, at roughly $1 trillion, so even a modest shift in its investors’ preferences matters for US yields….
For Hawai’i, a long stretch of high rates means lasting pressure on home sales, on the cost of borrowing for businesses and local governments, and on travel from Japan. How long it lasts depends on the national and global forces described above, which lie outside the islands’ control….
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