The relentless rout in U.S. long-term government bonds has investors seeing red-both figuratively and literally, in their portfolios. The natural inclination is to blame inflation, but the real cause lies elsewhere.

Losses on bonds expiring in a decade or more have accelerated since the Iran war. The iShares 20+ Year Treasury Bond exchange-traded fund-a popular instrument for investing in long-duration bonds-has fallen 1.2% over the past week, bringing its total return loss to 7.1% since Feb. 27, the day before the U.S. and Israel launched attacks on Iran.

Inflation is the traditional enemy of bonds, because it makes future returns worth less, killing investor demand and, in turn, bond prices. The current inflation rate of 3.4% remains above the Federal Reserve's 2% target, but it is a minor factor in today's bond market pain.

Given this environment, the real challenges are posed by so-called real yields. Real yields are a measure of the return on Treasury bonds minus expected inflation, and they have blasted higher due to a confluence of factors.

Yields on bonds rise when bond prices fall. The 10-year bond yield has gained about 0.83 percentage point since Feb. 27, and 0.76 percentage point, or about 92%, of the gain comes from real yields.

At the same time, investors' expectation of average annual inflation over a 10-year period has gone nowhere since the war began. The market expects inflation to average 2.34% annually over a 10-year period versus 2.26% on Feb. 27, a 0.08 percentage point gain-in other words, a nothing burger.

Higher real yields are a byproduct of both the stock and the flow of debt. At the start of 2026, the government's deficit had looked to be improving slightly compared to the prior year, but that improvement has now been wiped out as Washington refunds tariff revenue. That means both the stock of debt-at $40 trillion and counting-and the flow of debt-at over $230 billion in 10-, 20-, and 30-year bonds issued quarterly-remain high. More debt equals more risk, and bond investors don't like to pay for that.

The fiscal picture is worsening at a time when private investors such as hedge funds, individuals, and other big-money investment funds-not the central bankers of the world-have become a major buying force. Private-sector investors currently own about 75% of Treasuries as opposed to roughly 50% a decade ago and that means the Treasury buyer base has become far more sensitive about paying the right price, said Head of US Rates Research at Barclays Capital Anshul Pradhan in a podcast this morning.

To add to the double whammy, America's biggest and brightest companies are also issuing more debt to fund their artificial-intelligence ambitions. Given their strong balance sheets, they are providing tough competition for Treasuries. Nearly $1.7 trillion in corporate debt has been issued in 2026 through August, up 27% from the same period in 2025, according to Sifma.

All these relatively obscure factors can be measured using the so-called term premium, a component of the real yield. Term premium reflects the additional return or yield investors expect for holding relatively riskier long-term U.S. bonds and notes rather than safer shorter-term debt. The term premium reached its highest level for this year on Aug. 17 at 0.895 percentage points, though the latest value for the end of August was 0.728 percentage points.

The upshot? For a 10-year bond, real yield has surged to 2.44%, close to the highest level seen since Oct. 31, 2023.

Investors reeling from their losses in long-term bonds should blame the real yield, not the Fed's efforts to fight inflation.