How sustainable is the rise in global bond yields? by Investing.com

Investing.com — There has been widespread debate about the sustainability of recent increases in global bond yields, as well as their continued impact on financial markets and economies.

Although short-term volatility may support higher yields, cyclical forces and structural factors suggest yields will eventually stabilize, according to BCA Research analysts.

The rise in bond yields, especially since the first rate cut by the US Federal Reserve in late 2024, reflects a combination of factors.

Expected changes in monetary policy were the main drivers in the market’s assessment of the direction of future rate hikes.

This reform has been replicated globally, affecting products in both developed and developing markets.

However, the longer-term yield curve has become steeper than immediate policy expectations, focused on rising inflation uncertainty and concerns about government funding.

BCA research suggests that much of the recent increase in yields can be attributed to risk-adjusted adjustments.

Countries with a current account deficit such as the United States and the United States Government (Tadawul:) Compared to surplus economies like Germany and Japan, it has seen a more significant increase.

This suggests that volatile investors are increasing the need for more fiscal exposures and external financing, which could exacerbate the volatility of bond markets.

Despite these headwinds, BCA Research maintains a cautiously optimistic outlook for government bonds over the medium term.

The broker exhibits the self-limiting behavior of high output that slows growth and inflation.

Higher borrowing costs are weighing on interest rate-sensitive sectors such as home and corporate finance, signs of slowing activity in bond markets and growing refinancing challenges for corporate borrowers.

These developments are consistent with broad expectations of a slowdown in economic growth, which may put downward pressure on output over time.

At the regional level, the BCA emphasizes the value in certain government bonds, particularly those from economies with high risk exposures and weak growth prospects.

The UK, for example, stands out as an attractive market despite recent production increases. Analysts argue that the sell-off in UK gilts is fundamentally different from the 2022 mini-budget crisis and reflects broader global volatility rather than domestic fiscal uncertainty.

The high risk premium in UK bonds, combined with the cyclical vulnerability of the economy, provides a compelling risk-reward profile.

Rising inflation volatility in the United States continues to be a major theme. The Federal Reserve has shown greater concern about long-term price stability, which has contributed to the rise in the term premium.

However, the BCA said these uncertainties are unlikely to continue indefinitely, especially as economic growth moderates and inflation slows.

This backdrop strengthens the case for maintaining portfolio longevity above the benchmark by prioritizing high-quality government bonds over corporate debt.

A rise in global bond yields affects the broader economy. Rising yields and a strengthening US dollar pose challenges for emerging markets whose debt is denominated in dollars.

Additionally, tighter financial conditions could weigh on international trade and investment flows, adding to the downside for growth.

BCA Research recommends defensive positioning in fixed income portfolios, prioritizing duration management and exposure to a selection of government bonds.

While there may be more volatility in the near term, the broker emphasizes long-term bond prices, especially as the economic cycle shifts to slower growth and lower inflation.