Investing.com — There is widespread debate about the sustainability of recent increases in global bond yields, as well as their potential impact on financial markets and economies.
While near-term dynamics may support higher yields, cyclical forces and structural factors indicate that yields will eventually stabilize, according to analysts at BCA Research.
The rise in bond yields, particularly after the US central bank’s first rate cut in late 2024, reflects a combination of factors.
Adjustments in monetary policy expectations have been the main driver, with the market reassessing the path of future rate hikes.
This realignment reverberated globally, affecting yields in both developed and emerging markets.
However, the long end of the yield curve is increasingly diverging from immediate policy expectations, highlighting the growing importance of term premiums driven by inflation uncertainty and sovereign funding concerns.
BCA Research notes that much of the recent increase in yields can be attributed to adjustments in risk premia.
Countries with a current account deficit, such as the US and the US Kingdom (TADAWUL:), experienced more pronounced increases compared to surplus economies such as Germany and Japan.
These dynamics suggest that investors are taking into account greater fiscal vulnerabilities and the need for external financing, which could exacerbate volatility in bond markets.
Despite these headwinds, BCA Research maintains a cautiously optimistic outlook for government bonds over the medium term.
The brokerage points to the self-limiting nature of higher yields, which tend to dampen growth and inflationary pressures.
High borrowing costs are already weighing on interest rate-sensitive sectors such as housing and corporate finance, with signs of reduced activity in mortgage markets and increasing refinancing challenges for corporate borrowers.
These developments are in line with broader expectations of a slowdown in economic growth, which is likely to put downward pressure on yields over time.
Regionally, the BCA emphasizes the value of certain government bonds, especially those from economies with a higher risk premium and weaker growth prospects.
The UK, for example, stands out as an attractive market despite recent jumps in yields. Analysts argue that the sell-off in British plantations is fundamentally different from the mini-budget crisis of 2022 and reflects broader global dynamics rather than domestic fiscal instability.
The increased risk premium in UK bonds, coupled with the cyclical vulnerability of the economy, provides a compelling risk-reward profile.
In the United States, the uncertainty of rising inflation remains a central theme. The Federal Reserve signaled increased concern about long-term price stability, which contributed to the rise in term premiums.
However, the BCA argues that these uncertainties are unlikely to last indefinitely, particularly as economic growth slows and inflationary pressures ease.
This backdrop reinforces the case for maintaining portfolio duration above the benchmark, favoring high-quality government bonds over corporate debt.
The rise in global bond yields also affects the broader economy. Rising yields and a strengthening US dollar pose challenges for emerging markets whose debt is denominated in dollars.
In addition, tighter financial conditions could weigh on global trade and investment flows, amplifying downside risks to growth.
BCA Research advises defensive positioning in fixed income portfolios, prioritizing duration management and selective exposure to government bonds.
Despite the possibility of further volatility in the short term, the brokerage emphasizes the long-term value of bonds, especially as the economic cycle shifts to slower growth and lower inflation.
