Investing.com – There has been widespread debate about the sustainability of the recent rise in global bond yields, and their potential impact on financial markets and the economy.
Although short-term dynamics may support higher yields, cyclical forces and structural factors indicate that yields will eventually stabilize, as analyzed in BCA Research.
The rise in bond yields, especially since the US Federal Reserve's first rate cut in late 2024, reflects a combination of factors.
Adjustments to the expected monetary policy have been a major driver, with the market reassessing the trajectory of future inflation.
This adjustment has reverberated around the world, influencing yields in all developed and emerging markets.
However, the long end of the yield curve has risen with rising policy expectations, underscoring the growing importance of term premia driven by inflation uncertainty and government funding concerns.
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 Kingdom (TADAWUL :), have experienced a more pronounced increase compared to surplus economies such as Germany and Japan.
This volatility suggests that investors are facing greater financial risk and the need for external funding, which may increase the volatility of bond markets.
Despite these headwinds, BCA Research maintains a cautiously optimistic outlook on government bonds over the medium term.
The brokerage's natural flag is to limit itself to high yields, which tend to dampen growth and pressure inflation.
Rising borrowing costs are already weighing on interest-bearing sectors, such as housing and corporate finance, with signs of slowing activity in loan markets and growing funding challenges for corporate borrowers.
This development is consistent with broad expectations of slower economic growth, which may put downward pressure on yields over time.
Regionally, BCA emphasizes value on certain government bonds, particularly those from economies with high risk premia and weak growth prospects.
The UK, for example, stands out as an attractive market despite recent rising yields. Analysts say the selloff in UK gilts is a stark contrast to the 2022 budget crisis and reflects global strength rather than domestic currency instability.
The elevated risk premium on UK bonds, combined with its cyclical vulnerability, provides a compelling risk-reward profile.
In the United States, rising inflation is still a hot topic. The Federal Reserve has shown increased concern about long-term price stability, contributing to an increase in term premia.
However, BCA argues that this uncertainty is unlikely to continue forever, especially as economic growth moderates and inflationary pressures ease.
This is behind strengthening the portfolio's long-term nature, preferring high-quality government bonds over corporate debt.
Rising global bond yields are also affecting the wider 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 put pressure on global trade and investment flows, increasing risks to growth.
BCA research recommends a defensive position in fixed income portfolios, prioritizing time management and selective exposure to government bonds.
Despite the possibility of continued 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.