Investing.com — There has been widespread debate over the sustainability of recent rises in global bond yields, as well as their potential impact on financial markets and economies.
Although short-term momentum may support high returns, cyclical forces and structural factors indicate that returns will eventually stabilize, according to analysts at BCA Research.
The rise in bond yields, particularly since the first rate cuts by the US Federal Reserve at the end of 2024, reflects a combination of factors.
Adjustments in monetary policy expectations have been a major driver, with the market reassessing the trajectory of future rate hikes.
This realignment has reverberated globally, influencing returns in both developed and emerging markets.
However, the long end of the yield curve has become increasingly decoupled from immediate policy expectations, highlighting the growing importance of term premia driven by inflationary uncertainty and public financing concerns.
BCA Research notes that much of the recent rise in yields can be attributed to adjustments in risk premia.
Countries with a current account deficit, such as the United States and the United States Kingdom (TADAWUL:), experienced more pronounced increases than surplus economies like Germany and Japan.
This dynamic suggests that investors are factoring in greater fiscal vulnerabilities and the need for external financing, which could exacerbate bond market volatility.
Despite these headwinds, BCA Research maintains a cautiously optimistic outlook for government bonds over the medium term.
The brokerage highlights the self-limiting nature of higher yields, which tend to dampen growth and inflationary pressures.
High borrowing costs are already straining interest rate-sensitive sectors such as housing and business finance, with signs of reduced activity in mortgage markets and increasing difficulties in refinancing for borrowing companies.
These developments align with broader expectations of slowing economic growth, which could put downward pressure on yields over time.
At the regional level, BCA emphasizes the value of certain government bonds, particularly those from economies with higher risk premia and lower growth prospects.
The UK, for example, stands out as an attractive market despite recent increases in yields. Analysts say the UK gilt selloff is fundamentally different from the 2022 mini-fiscal crisis and reflects broader global dynamics rather than domestic fiscal instability.
The high risk premium of UK bonds, combined with the cyclical vulnerability of its economy, offers a compelling risk-reward profile.
In the United States, growing inflation uncertainty remains a central theme. The Federal Reserve has expressed increased concerns about long-term price stability, contributing to rising term premia.
However, BCA says these uncertainties are unlikely to persist indefinitely, particularly as economic growth slows and inflationary pressures ease.
This context strengthens the case for maintaining portfolio duration above the benchmark, favoring high-quality government bonds over corporate debt.
A rise in global bond yields also impacts the broader economy. Rising yields and a strengthening U.S. dollar pose challenges for emerging markets with dollar-denominated debt.
Additionally, 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, favoring duration management and selective exposure to government bonds.
Despite the possibility of increased near-term volatility, the brokerage emphasizes the long-term value of bonds, particularly as the business cycle shifts toward slower growth and lower inflation.
