Long-Term Borrowing Costs Stay High Even as the Dollar and Short-Term Yields Ease
Global Markets · Fixed Income, Liquidity & Currencies — Weekly Report · Publication 5 August 2026 · Review 28 July–4 August 2026
Global borrowing conditions improved slightly at the short end of the market, but long-term financing remains expensive because inflation, government borrowing and policy uncertainty have not disappeared.
Executive summary
Global fixed-income conditions sent mixed signals during the review period.
The United States two-year government-bond yield fell to 4.20%. This suggests that investors reduced some expectations of an immediate interest-rate increase after oil prices declined. However, the ten-year yield ended slightly higher at 4.63%. Longer-term borrowing costs are therefore not following short-term yields lower. Investors remain concerned about inflation, heavy government borrowing and the risks of lending for many years.
The US dollar index fell to about 99.86. A weaker dollar can reduce pressure on countries and companies with dollar debt. It may also support emerging-market currencies. The move is helpful, but one week is not enough to confirm a lasting change.
Company-bond markets remained calm. Credit spreads - the extra return investors demand for lending to companies rather than the government - narrowed. This does not confirm a broad credit crisis.
Confirmed fund transactions were more cautious. Global bond funds received US$6.16 billion, but this was the weakest intake in 17 weeks. Emerging-market bond funds recorded approximately US$800 million of withdrawals.
The overall position is mixed. Income from bonds remains attractive, but long-term bonds face large price swings. The main risk is another rise in oil and inflation. Readers should watch US employment, inflation and government-debt auctions next.
What this means to investors
Cash and short-term bonds continue to offer useful income with less price risk than long-term bonds. They may suit investors who value stability and access to money. Their main weakness is reinvestment risk: future income may fall when maturing money must be invested again.
Long-term bonds offer higher starting income. They may also rise strongly if inflation falls and central banks become more willing to cut rates. However, their duration - sensitivity to interest-rate changes - is much greater. A renewed rise in long-term yields would reduce their market value.
Real yields remain important. A real yield is the return left after inflation. The US ten-year real yield was approximately 2.40%. This is attractive compared with the very low or negative real yields seen during the pandemic period, but it also keeps international financing expensive.
Corporate bonds still provide extra income over government bonds. However, current credit spreads are narrow. Investors receive less protection if company profits weaken or defaults increase. Lower-rated company debt deserves particular caution because confirmed fund flows turned negative.
Currency movements can materially change offshore returns. For example, a Kenyan investor may earn interest on a US-dollar bond but lose part of that gain if the dollar weakens against the shilling. Hedging can reduce this risk, but the cost depends on interest-rate differences, market liquidity and dealer charges.
For Africa, the weaker dollar is helpful. High global real yields and reduced emerging-market bond flows remain negative. For Kenya, stable local rates and a steady shilling offer protection, but oil prices and global refinancing costs remain important risks.
Market at a glance
One basis point equals 0.01 percentage point.
| Indicator | Latest | Prior | Move | What it means | Data date |
|---|---|---|---|---|---|
| US two-year government yield | 4.20% | 4.26% | Down | Immediate rate pressure eased | 4 Aug |
| US ten-year government yield | 4.63% | 4.61% | Up | Long-term financing remains tight | 4 Aug |
| German ten-year government yield | 3.16% | 3.11% | Up | European long-term costs increased | 4 Aug |
| US ten-year real yield | 2.40% | 2.41% | Down | Inflation-adjusted income remains high | 4 Aug |
| US dollar index | 99.86 | 101.42 | Down | Some relief for dollar borrowers | 4 Aug |
| US investment-grade credit spread | 78 bp | 81 bp | Down | Strong companies still have market access | 3 Aug |
| US high-yield credit spread | 278 bp | 284 bp | Down | No broad corporate credit alarm | 3 Aug |
Sources: US Treasury nominal yields; US Treasury real yields; Deutsche Bundesbank; US dollar index; FRED credit spreads.
WHAT THIS TELLS US Short-term pressure eased, but long-term borrowing conditions did not meaningfully improve. The weaker dollar and narrower company-bond spreads are supportive. High real yields and rising European government yields show that global financial conditions remain restrictive.
Where did government-bond yields move during the week?
FIGURE 1. Where did government-bond yields move during the week?
Sources: US Treasury; Deutsche Bundesbank.
WHAT THIS TELLS US The easing was concentrated in short-term US yields. Long-term US and German yields rose, which points to continuing concern about inflation, government borrowing and the risk of lending for many years.
What changed?
Short-term US yields fell, but long-term yields did not. The two-year US yield fell by six basis points. The ten-year yield rose by two basis points over the same period. This difference matters. Short-term yields respond mainly to expected central-bank decisions. Long-term yields also reflect inflation, government borrowing and the uncertainty involved in lending for many years. The Federal Reserve left its policy rate at 3.50%-3.75%. Three policymakers preferred an increase, confirming that inflation concerns remain active. (Sources: Federal Reserve statement.)
European borrowing costs remained elevated. Germany's ten-year yield rose five basis points to 3.16%. German inflation accelerated in July as energy costs increased. The European Central Bank kept its deposit rate at 2.25%. It also continued allowing its bond holdings to decline. This removes some central-bank demand from the market. UK ten-year yields fell late in the period as oil prices declined, but remained close to 4.9%. Britain therefore continues to face significantly higher borrowing costs than Germany. (Sources: European Central Bank decision.)
The dollar weakened. The dollar index fell by approximately 1.5%. Lower oil prices reduced demand for the dollar as a defensive asset. Investors also reduced expectations of an immediate US rate increase. Joint US-Japan currency intervention added volatility. Intervention supported the yen temporarily, but lasting improvement will probably require changes in Japanese interest rates, oil prices or US policy expectations. (Sources: Reuters currency review.)
Company-bond pricing remained calm. Investment-grade debt - bonds issued by more creditworthy companies - recorded a slightly smaller credit spread. High-yield debt - lower-rated company bonds carrying greater default risk - also saw its spread narrow. Company-bond pricing therefore did not confirm the concern visible in long-term government yields. However, narrow spreads leave less protection if economic conditions weaken.
Why did it happen?
- 1Oil prices fell. Oil prices declined sharply as markets became more hopeful about negotiations involving the United States and Iran. Lower oil reduces expected inflation and gives central banks more room to avoid additional rate increases.
- 1Monetary-policy uncertainty remained. The Federal Reserve held rates steady, but three policymakers supported an increase. The European Central Bank also held rates. These decisions were not automatic easing. Both central banks remain concerned about energy-driven inflation.
- 1Governments needed to borrow more. The US Treasury expects to borrow US$739 billion from private investors during the July-September quarter. This is US$68 billion above its previous estimate. Greater supply can push yields higher because investors must absorb more debt. (Sources: US Treasury borrowing estimate.)
- 1Risk appetite stayed firm. Company earnings remained resilient, helping corporate credit spreads narrow. This explains why company bonds did not weaken as much as long-term government bonds. Dollar weakness also reflected changing interest-rate expectations and official currency intervention. It did not represent a clear long-term rejection of US assets.
Who benefits and who faces pressure?
| Group, asset or sector | Likely effect | Reason | Main risk |
|---|---|---|---|
| Cash and short-term bond investors | Positive | Income remains attractive with lower price swings | Income falls when rates decline |
| Long-term government-bond investors | Mixed | High starting income, but large price sensitivity | Inflation or supply pushes yields higher |
| Strong corporate borrowers | Mildly positive | Credit spreads narrowed | Government yields remain expensive |
| Lower-rated borrowers | Negative | Fund withdrawals show greater selectivity | Refinancing becomes unaffordable |
| African sovereign issuers | Mixed to negative | Weaker dollar helps, but real yields remain high | Capital withdrawals and currency weakness |
| Kenyan savers and institutions | Mildly positive | Local yields remain above inflation | Oil, tax and future inflation reduce real returns |
WHAT THIS TELLS US The environment rewards income, quality and shorter maturity. It remains difficult for highly indebted governments and lower-rated companies. Long-term bonds offer opportunity only alongside greater price risk.
Where is money moving?
Confirmed fund transactions show that investors continued buying bonds, but at a much slower rate. Global bond funds received a net US$6.16 billion in the week ended 29 July. This was their weakest intake in 17 weeks. Government-bond funds received US$1.99 billion, while short-term bond funds received US$478 million.
High-yield bond funds recorded US$789 million of withdrawals. Emerging-market bond funds lost approximately US$800 million. Money-market funds recorded US$6.55 billion of withdrawals. These figures cover funds reporting to LSEG Lipper and do not represent every institutional portfolio.
FIGURE 2. Which fixed-income fund segments received or lost money?
Sources: LSEG Lipper flows reported by Reuters.
WHAT THIS TELLS US Confirmed transactions show modest movement into government and short-term bond funds, alongside caution toward lower-rated and emerging-market debt. Narrower credit spreads show stronger pricing, but do not by themselves prove that new money entered company bonds.
An earlier reported record withdrawal from US investment-grade funds should not be treated as confirmed. LSEG began reviewing a large transaction that may have been an operational transfer rather than a true investor redemption. (Sources: Reuters data review.)
Dollar funding remained orderly rather than easier. The US secured overnight funding rate held near 3.65%. The proposed expansion of the Federal Reserve's foreign-authority lending facility is a possible precaution, not evidence that institutions are already unable to obtain dollars.
Africa and Kenya
Africa receives limited relief from the weaker dollar. A softer dollar can reduce the local-currency value of dollar interest and principal payments. It may also support African currencies and reduce imported inflation.
The relief remains fragile. African governments face more than US$90 billion in external principal repayments during 2026. High US real yields increase the return international investors can earn without accepting African credit or currency risk. (Sources: African refinancing outlook.)
In Kenya, the Central Bank's indicative rate was KSh129.42 per US dollar on 5 August. The shilling therefore remained relatively stable.
The latest Kenyan Treasury-bill auction produced average rates of 8.788% for 91 days and 9.017% for 364 days. Against June inflation of 6.41%, these rates imply a positive return after recent inflation, before tax and other costs. Future inflation may differ.
FIGURE 3. Did Kenyan Treasury-bill yields remain above recent inflation?
Sources: Central Bank of Kenya auction results; Kenya National Bureau of Statistics.
WHAT THIS TELLS US Kenyan Treasury-bill income remained above the latest inflation rate before tax and costs. This offers some protection to local savers, but it is not guaranteed: future inflation, taxes and reinvestment rates can change the result.
For Kenyan holders of offshore bonds, currency remains part of the investment result. A KSh1 million offshore position can earn dollar interest but still produce a weak shilling return if the dollar loses enough value against the shilling.
What could change this view?
BASE CASE. Short-term yields remain sensitive to economic data while long-term yields stay elevated. Dollar funding should remain available, but global liquidity is unlikely to improve rapidly while major central banks reduce their bond holdings.
POSITIVE POSSIBILITY. Lower oil prices, softer inflation and steady corporate credit could pull the US ten-year yield below 4.4%, weaken the dollar and reopen financing opportunities for emerging markets.
NEGATIVE POSSIBILITY. Renewed oil disruption, stronger inflation or poor government-bond auctions could push the US ten-year yield toward 4.9%, the dollar index above 102 or the high-yield credit spread above 350 basis points.
The conclusion would change if:
- US employment and inflation weaken consistently.
- Government-bond auctions show unusually weak demand.
- Corporate credit spreads widen while bond funds record withdrawals.
- Emerging-market bond funds return to sustained inflows.
- Oil and the dollar begin rising together.
What to watch next
| Date | Event | Why it matters | Market or sector affected |
|---|---|---|---|
| 5 Aug 2026 | US quarterly borrowing details | Shows the maturity and volume of new debt supply | Global government bonds |
| 6 Aug 2026 | Kenya Treasury-bill auction | Tests local demand and yield direction | Kenyan fixed income |
| 7 Aug 2026 | US July employment report | May change expectations for Federal Reserve policy | Bonds, dollar and emerging markets |
| 12 Aug 2026 | US July inflation report | Tests whether lower oil is reducing inflation pressure | Global yields and currencies |
Sources: US Bureau of Labor Statistics calendar; Central Bank of Kenya Treasury bills.
WHAT THIS TELLS US The next decisive evidence will come from US debt supply, employment and inflation. Kenya's auction will show whether domestic demand remains strong at current yields.
Final Desk takeaway
Global borrowing conditions have stopped worsening at the short end, but they have not become broadly easy.
The weaker dollar, stable funding markets and narrow company-bond spreads reduce the risk of an immediate financial shock. High long-term and real yields still create pressure for governments, companies and emerging markets that need to refinance.
For Africa, the weaker dollar offers temporary relief. It does not remove the region's heavy repayment burden. Kenya is better protected by a stable shilling, positive local real yields and stronger foreign-exchange buffers, but remains exposed to oil and global investor sentiment.
The central question is now whether lower oil produces lasting inflation relief. If it does, bonds and emerging markets may gain support. If it does not, long-term borrowing costs are likely to stay high.
IMPORTANT NOTICE: This report provides general market information. It is not personalised investment, legal or tax advice, and it does not recommend a specific purchase, sale or portfolio allocation.
Sources
Deutsche Bundesbank — daily yields of federal securities
European Central Bank decision
US Treasury borrowing estimate
LSEG Lipper flows reported by Reuters
African refinancing outlook (Reuters)
Central Bank of Kenya auction results
Kenya National Bureau of Statistics