Is a Sovereign Bond Market Riot Brewing?

No. Sovereign bond yields across developed markets are likely to stay higher for longer given the macro, monetary, and fiscal backdrop, but a sustained, disorderly rise in yields looks unlikely. Yields largely reflect economic fundamentals and monetary policy expectations rather than acute fiscal stress. We believe investors should retain core high-quality fixed income exposure but broaden diversification beyond developed markets sovereign bonds.

Sovereign bond yields have risen across developed markets this year, extending a multi-year move that has taken yields to their highest levels in decades. Thirty-year US Treasury yields recently touched 5.4%, their highest level since 2004. The reset largely reflects stronger nominal growth: annual US nominal GDP growth averaged 6.2% in the 2020s, versus 4.1% in the 2010s. Much of this increase was driven by stickier inflation, amplified by supply disruptions and geopolitical shocks that have increased macroeconomic uncertainty and required significant monetary tightening. This year, the Iran War has disrupted global energy markets, reinforced inflation risks, and increased the likelihood of further tightening. Around 80% of central banks tracked by the Bank for International Settlements have raised policy rates, up from none at the start of the year. In September, the European Central Bank raised rates for the second time this year, and the Federal Reserve and Bank of Japan are expected to follow this week.

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