Bond Yields – What Are They and Why Do They Matter?

What is a bond?

"Bond yields, bond yields." Lately we keep hearing about them all the time. What are they? Why do they matter? How do they affect us?

Let's start by understanding what a bond actually is. A bond is a debt certificate. It is a loan. So far – not very clear. But let's go into detail.

Take a certain entity, like, for example, the Government of Israel. Or the US government. Or Google, or Bank Hapoalim. It doesn't matter who. This entity, let's say the Government of Israel, is short of money. It has a few alternatives:

• Cut expenses, meaning cut the budget. Fewer roads, less welfare, maybe less defense. Every government and its own priorities.
• Increase revenue, meaning raise taxes. More income tax, more VAT, a tax on study funds (Keren Hishtalmut) – again, every government and its own priorities.
• Take loans and hope that in the future the cash flow will be balanced and the debt won't keep growing endlessly.

By the way – exactly like our own household. No difference at all. The principle is exactly the same, only everything is, of course, more complex.

How does a country take a loan?

Now, like many of us, governments also often choose to take loans. When we want a loan, we go online, click a few links and presto – shortly afterwards the money is in our account. For a country, this part is a bit more complex.

What a country does is issue a bond. A bond is a loan contract. I'll explain, as usual, with an example: suppose the state wants to borrow 100 shekels. What does it do? It issues a bond priced at 100 shekels. I, Gad, or anyone else, buy this bond and pay the state 100 shekels. And there you go – I have lent 100 shekels to the Government of Israel.

But wait a moment. Why should I lend 100 shekels to the state? What's in it for me? Well – in the loan contract between me and the state, it undertakes to pay me a certain interest every year on my loan and to repay it within a few years. Let's say a 100-shekel bond for 5 years at 4%.

In this case, the state will pay me 4 shekels every year and in five years will return my 100. The 4 shekels each year are called the coupon (Coupon). All in all – not bad.

The 4 shekels, or 4%, are the bond yield at this stage, and the five years are the bond's term.

Why do bond yields go up and down?

So far, pretty simple. So how come yields are something that goes up and down? After all, this is a fixed number known in advance. Here's the story: from the moment I lent the state those 100 shekels, I now hold a piece of paper (or, more accurately, a line in a computer) saying I will receive 4 shekels every year for five years and 100 back at the end of the term.

Suppose I need the money. Or I think I can do better with it elsewhere. What do I do? I offer my bond for sale to anyone interested. How do I do that? On the capital market. Once the bond is mine – I can sell it to whoever I want, and the price will be set by supply and demand at that moment. What is the reasonable price at which I'll sell the bond? 100 shekels, obviously. Theoretically – that's what it's worth.

But what if nobody wants to buy? What do I do? Lower the price, of course. How low do I go? Down to the price at which someone will buy.

Suppose I found a buyer at 98 shekels. I sold, all good. That buyer paid 98 shekels but will still receive 4 shekels a year and 100 at the end of the term. That's what the contract says. He is no longer at a 4% yield. He is at 4.46%. Because 4 shekels on 98 is 4.08%, and there are another two shekels he will receive at the end of the term. Because the state will, after all, return 100 to him. And there you go – the bond yield has gone up.

And suppose I didn't find a buyer at 98? What do I do? I keep lowering the price until someone is willing to buy. Suppose the price at which someone is willing to buy is 90. That happy buyer will be at a 6.4% yield. Because 4 shekels on 90 is 4.44%, plus another 10 shekels he will receive at the end of the term. And me? I, of course, lost 10%.

Why does the bond price fall?

Why should the price fall at all? Why wouldn't I find a buyer at 100 or 98? And why would I be willing to go down to 90? After all, the 4 shekels every year and the 100 at the end are fixed, known and safe numbers.

Well – if the buyer trusts the Government of Israel less today, and fears there is a chance it won't repay the loan in the future – he will demand a risk premium, as he perceives that risk. He will no longer settle for a 4% yield but will demand a 4.46% yield.

And if the Government of Israel raised a billion shekels, meaning it sold 10 million bonds of 100 shekels each, and instead of one buyer we have tens or hundreds of thousands of buyers, whom we can call "the market" – then, there you go – the bond yield has risen from 4% to 4.46%.

So now we understand what a bond is and what bond yields are.

What's the situation today? The US 10-year Treasury yield

Let's see what the situation is today, how it affects the stock market and what we can do with it.

As of today, the beginning of October 2026, the US government 10-year bond yield is 5.2%-5.28%.

Its price is about 95 dollars and its coupon is 4.625 dollars. Seemingly, a yield of 4.87%. But, as usual, let's not forget that on the bond's maturity date the government will return 100 dollars to us for each unit, so together with the additional 5 dollars the yield comes to 5.2%-5.28%. Again – as of the beginning of October 2026.

Why is this happening? Why is the yield on US government bonds so high? And why does it actually interest me?

Why does this interest me? The effect on stocks, mortgages and the dollar

I'll start with the second question – why it interests me.

US bonds are considered a risk-free asset. We all expect the US government to pay us the coupon every year and also to repay the loan at the end. And so – today I have an asset on the market that is considered risk-free and gives a gross yield of about 5.2%. For comparison, a shekel money market fund (Keren Kaspit) gives 3%-3.2% today, not to mention bank deposits.

So I have a seemingly risk-free asset that gives me a great yield. That attracts money, and it creates an alternative to the capital market.

Most investors build their portfolio from some combination of different assets at different risk levels. And if I have a risk-free asset that gives me a relatively high yield – I'll move money into it. From where? From my stocks, at least part of it. And so – when bond yields rise – the capital market falls. Because people buy bonds instead of buying stocks.

Another thing bond yields do – they affect the interest rates of quite a few loans, for example mortgages on the KALATZ track (fixed unlinked).

They can also affect the dollar exchange rate – if demand for US bonds rises, people sell shekels and buy dollars, which is a force pushing the dollar up against the shekel.

None of these effects stands on its own. There are many other factors affecting these things, but bond yields are one of them.

Why have US bond yields risen?

And back to the first question – why is this happening? There are several reasons, but I'll list two main ones.

1. The US government is raising debt like there's no tomorrow

In recent years the US government has been raising debt like there's no tomorrow. Which is a euphemism for taking loans. The country's total debt has already passed 40 trillion dollars, and there is no sign that it will go down in the coming years. So even though, on the one hand, the US government is considered a very safe borrower – in the end the market's patience has a limit, and it "punishes" it and demands a higher risk premium than in the past to lend it money.

2. The big tech companies are issuing bonds

In recent years the big high-tech companies, the Nvidias, Googles and Amazons of the world, have been investing insane amounts in data centers and computing power. Until recently they invested their own money. But lately they have started to run out of spare cash, and they have started taking loans = issuing bonds.

The bonds of Nvidia, Google, etc. offer an alternative to US government bonds, and in effect increase the total supply of low-risk bonds currently on the market. One can argue about the risk of these companies' bonds, but the market perceives them as fairly low risk.

And what happens when the supply of a certain product rises? Its price falls, of course. So as we have already seen – when the price falls, the yield rises.

How do you buy US government bonds from Israel?

If US government bonds are so good – maybe I'll buy a few?

First of all – this is not a recommendation. Each and every one of you should make your own considerations.

Second – if someone has decided to buy US government bonds, there are several ways to do it. I'm talking only about buying in Israel, not about those who have an account in the US.

Direct purchase

One way is to buy the bonds directly, but that is a bit complex and also requires a relatively high minimum investment.

US ETFs

A second way – if my trading account is open for trading abroad (whether at a bank, heaven forbid, or a self-directed trading account) – I can buy the following securities:

• SGOV – very short term
• SHY – 1 to 3 years
• IEF – 7-10 year term
• TLT – long term, over 10 years

ETFs on the Tel Aviv Stock Exchange

If I don't want to deal with foreign securities, I can buy one of the securities in the following table:

All the securities above are Migdal's. I'm well aware there are others. This is not a recommendation – each and every one of you needs to do your own homework and apply your own judgment.

In summary

So now we all understand a little better what a bond is, why yields have risen and why it interests me.