Investors may need to brace for a new era of higher interest rates, according to the chief executive of one of the world's largest custody banks. Robin Vince, CEO of BNY, told Reuters that 10-year US Treasury yields around 5.25% look less like a market shock and more like a return to normal after a rapid bond selloff pushed borrowing costs higher.
The comments come as bond markets have been roiled by a sharp rise in long-term yields, with the 10-year Treasury note climbing to levels not seen in years. For everyday investors, this matters because Treasury yields are the bedrock of global finance—they influence everything from mortgage rates to corporate borrowing costs and the returns on savings accounts.
Why yields are rising
The recent move in yields has been driven by a combination of factors. On one hand, the US economy has remained surprisingly resilient, with strong consumer spending and a robust labor market. On the other, the rapid adoption of artificial intelligence has fueled a wave of investment in data centers, power grids, and other infrastructure, which could keep economic growth—and inflation—higher for longer.
Vince pointed to these dynamics, noting that AI-driven growth is keeping inflation worries in play. When inflation runs hot, bond investors demand higher yields to compensate for the erosion of purchasing power. That pushes prices of existing bonds down and raises the yield on new issues.
The bond market's reaction has been swift. A higher yield environment raises the earnings bar for stocks, as companies face steeper borrowing costs and investors can earn attractive returns from safer assets like Treasuries.
What 'normalization' means
For much of the past decade, investors grew accustomed to ultra-low interest rates. After the 2008 financial crisis and again during the pandemic, central banks slashed rates to near zero and bought massive amounts of bonds to stimulate the economy. That kept yields artificially low.
Now, with inflation having spiked and the Federal Reserve raising its benchmark rate to combat it, the era of cheap money appears over. Vince's view is that a 10-year yield around 5.25% is not an anomaly but rather a return to a more historically typical level. Before the 2008 crisis, the 10-year yield often traded in the 4% to 6% range.
This perspective is echoed by some market analysts who see the recent selloff as a repricing rather than a panic. However, the speed of the move has been jarring, and it has already had ripple effects across global markets. For instance, German Bund yields fell as AI trade jitters sparked a flight to safety, showing how interconnected bond markets are.
What it means for investors
For ordinary investors, the message is clear: don't expect a quick return to the low-rate environment of the 2010s. That has several implications.
- Bond investors: Higher yields mean new bonds offer better income, but existing bond funds with longer durations may see price declines. Shorter-term bonds are less sensitive to yield moves.
- Stock investors: Higher yields can pressure stock valuations, especially for growth and technology companies that promise profits far in the future. The discount rate used to value those future earnings rises with yields.
- Borrowers: Mortgage rates and corporate loan rates are likely to stay elevated, which could cool housing and business investment.
- Savers: On the flip side, higher yields mean better returns on cash in savings accounts, money market funds, and certificates of deposit.
Vince's comments also come at a time when AI credit insurance costs have surged as bond investors grow wary, reflecting concerns that the AI boom could lead to overinvestment and eventual defaults. That is a risk to watch, as a sudden reversal in AI sentiment could trigger a flight to safety and push yields lower.
Looking ahead
The key question for markets is whether the Fed will need to keep rates higher for longer, or even raise them again, to keep inflation in check. The central bank has signaled it is in no hurry to cut rates, and the recent rise in long-term yields could do some of the Fed's work by tightening financial conditions.
For now, BNY's CEO is advising investors to adjust their expectations. "Normalization" may be uncomfortable for those who grew used to cheap money, but it could also signal a healthier, more sustainable economy—one less reliant on stimulus and more driven by genuine growth.
As always, investors should focus on their own time horizons and risk tolerance. While higher yields pose challenges, they also create opportunities for income. The key is to stay diversified and avoid making impulsive moves based on short-term market swings.
