What’s behind the global rise in bond yields?
The bond market has been undergoing a transformation over the past few months. Yields on longer-term bonds — with maturities of 10 years and up — have been rising. That’s been the case not just in the United States, but in Germany, the United Kingdom, Japan, Italy and France.
Loans to governments, of which bonds are one type, come in many flavors. They can last a matter of months, years or decades. They all offer a return — similar to an interest payment — to those who own them.
Over the past few months, investors have been walking away from longer-term bonds because, they’ve decided, the yields were too low.
“It’s been a pretty significant move to higher yields,” said Gargi Pal Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock.
The change in the U.S. has been spurred by a recalculation of what the future U.S. economy looks like.
“All of the data, the totality of the data, whether it be on the labor market, sentiment surveys, all of them have been pointing to a stronger U.S. economy,” said Chaudhuri.
A stronger U.S. economy still grappling with inflation, that is.
“Inflation is going to be higher than people had thought,” said Gershon Distenfeld, director of income strategies at AllianceBernstein. “The long-range inflation target, which the Fed has at 2%, we think that’s unrealistic. Secular trends like deglobalization, rise of populism — those are inflationary in nature. Inflation is probably going to be more like 2.5%, maybe even 2.75% in the long term.”
A future economy that’s stronger than expected, struggling with inflation that’s more stubborn than expected, would likely cause the Federal Reserve to keep future interest rates higher than expected. As this new reality has sunk in, the bond market has changed its expectations dramatically, said David Krause, professor of finance emeritus at Marquette University.
“The Federal Reserve, which we thought might cut interest rates as many as four times in 2025 — I think the current consensus is maybe one cut, or maybe even no cuts,” he said.
If interest rates will be higher down the road, so too will yields on short-term Treasury debt in the future. The returns on one-month or three-month Treasuries, for example, are highly influenced by the interest rates controlled by the Federal Reserve.
But bond investors today would miss out on that rosy future if their money is locked up in a decadelong loan to the government that offers a subpar return. That’s one reason the bond market has been insisting that long-term yields rise in the present.
Another is fear around future government spending. “It’s somewhat tied to how investors are thinking about the future of government deficits and how the U.S. Treasury is going to fund those deficits,” said Jon Duensing, head of fixed income at Amundi US.
Multiple budget models have predicted massive annual deficits in the trillions under the new administration and Congress. The government would need to borrow significantly more money and issue significantly more bonds to cover them. To convince the market to buy them all, the government may need to offer higher returns on that future debt.
Looking at it from anther angle, investors who purchased a 10-year bond with a relatively low yield based on conditions of the recent past would see their money underperform down the road compared to debt purchased in the future, when the government has to pay more to its creditors. Thus, those investors are demanding higher yields on the long-term bonds of today.
Finally, long-term yields can rise because the Federal Reserve is no longer aggressively intervening in the market and holding them down, said Sonal Desai, chief investment officer for fixed income at Franklin Templeton.
“The Fed was buying [longer-term] bonds … to the extent that today they hold, depending on the bond you’re looking at, anywhere between a quarter to a third of the entire publicly outstanding debt stock,” she said. “That’s enormous.”
All of this revolves around the U.S., yet longer-term bond yields have been going up all over the world. “There is not just a U.S. story in higher rates, but this is an Australia story, an Italy story, France, the U.K., Canada have seen higher rates,” said BlackRock’s Gargi Pal Chaudhuri.
Some of it, she said, is coincidence — countries have their own idiosyncratic economic issues to work through. But some of it is not.
“When U.S. rates go up, it tends to attract capital from the rest of the world. So you might see people exiting German bunds to put money into U.S. Treasuries,” said Franklin Templeton’s Desai. “The extent to which you are attracting capital from some of these other countries, you are going to see prices of those bonds go down as people sell them and yields go up.”
This linkage, most pronounced among bonds of developed economies, is one part of the phenomenon. Another is anxiety.
“It’s also the uncertainty that the world’s largest economy could change its trade policies rather radically in the spring,” said Marquette University’s David Krause. “If some of the threats of tariffs and major changes in trade policies come to fruition, some of the countries that are very reliant on trading with the U.S. have increased risk.”
If foreign bonds look more risky, their yields go up, kind of like how a homebuyer’s bad credit score makes a mortgage more expensive. So with bond yields around the world rising, Krause said there’s an even bigger picture to consider: “The era of cheap money is coming to an end.”
Bond yields filter out into an economy. Higher yields make borrowing more expensive not just for governments, but for companies and consumers. For a long time, we were used to low interest rates. Those days, Krause said, are gone.