Investing.com — There has been widespread debate about the sustainability of the recent rise in global bond yields, and its potential impact on financial markets and the economy.
While short-term strength may support higher yields, cyclical strength and structural factors indicate that yields will eventually stabilize, BCA Research analysts said.
The rise in bond yields, especially since the first rate cut by the US Federal Reserve in late 2024, reflects a combination of factors.
Adjustments in monetary policy expectations were a major factor, with the market reassessing the trajectory of future rate hikes.
This restructuring has reverberated around the world, affecting markets in all developed and emerging markets.
However, the long end of the yield curve has softened significantly on immediate policy expectations, underscoring the growing importance of term premia driven by inflation uncertainty and concerns over government finances.
BCA research notes that much of the recent rise in yields can be attributed to the adjustment of risk premia.
Countries with current account deficits, such as the United States and the United States The state (TADAWUL:), have experienced a more pronounced increase compared to residual economies such as Germany and Japan.
These variables suggest that investors are taking on more financial risk and the need for external financing, which may exacerbate volatility in bond markets.
Despite these headwinds, BCA Research maintains an optimistic outlook for government bonds over the medium term.
The brokerage is flagging the restrictive nature of high yields, which tends to dampen growth and inflationary pressures.
Higher borrowing costs are already weighing on interest-sensitive sectors, such as real estate and corporate finance, with signs of reduced activity in housing markets and growing refinancing challenges for corporate borrowers.
These developments are consistent with broader expectations of slower economic growth, which may put downward pressure on yields over time.
Regionally, the BCA emphasizes the importance of other government bonds, especially those from economies with high risk and weak growth prospects.
The UK, for example, stands out as an attractive market despite the recent rise in yields. Analysts argue that the selloff in UK gilts is very different from the 2022 micro-budget crisis and reflects wider global dynamics rather than domestic financial instability.
The high risk premium on UK bonds, combined with the cyclical vulnerability of its economy, provides a compelling risk-reward profile.
In the United States, rising inflation uncertainty remains a key theme. The Federal Reserve has shown heightened concern about long-term price stability, which contributes to rising term premia.
However, the BCA says this uncertainty will not last forever, especially as economic growth slows and inflationary pressures ease.
The latter strengthens the case for maintaining an above-benchmark portfolio length, favoring high-quality government bonds over corporate debt.
Rising global bond yields also have an impact on the wider economy. Rising yields and the strengthening of the US dollar pose challenges for emerging markets whose debt is denominated in dollars.
Additionally, tight financial conditions could weigh on global trade and investment flows, increasing risks to growth.
BCA Research advises on defensive positions in fixed income portfolios, prioritizing time management and selective exposure to government bonds.
Despite the possibility of further volatility in the near term, the brokerage emphasizes the long-term value of bonds, especially as the economic cycle shifts to slower growth and lower inflation.
