Bond yields across developed economies are rising mainly due to a combination of higher government deficits, increased debt issuance, quantitative tightening by central banks, and a reduced appetite among traditional buyers for long-dated bonds.
Main Drivers of Rising Yields:
Fiscal Deficits and Debt Issuance: Many governments are running large fiscal deficits and are borrowing heavily, increasing the supply of government bonds. This surge means investors demand higher yields to compensate for greater risks and abundant supply.
Quantitative Tightening (QT): Central banks (including the Fed, Bank of England, and ECB) are shrinking their bond portfolios—even during rate cuts—by letting bonds mature without reinvesting and, in some cases, actively selling government debt. This increases market supply and pressures yields upward.
Buyer “Strike” and Changing Investor Profile: Institutional investors such as pension funds and insurance companies have reduced their purchases of long-dated bonds in several countries, often due to internal reforms or shifting liability practices. This weakens traditional demand and drives yields higher.
Political Uncertainty: Instabilities, particularly in France, the UK, and the US, have raised doubts about governments’ willingness or ability to reign in spending, compounding investor concerns about fiscal discipline.
Economic Signals and Central Bank Policy: While inflation expectations have moderated, central banks are cautious on rate cuts, preferring to retain flexibility due to stubborn inflation and surprising economic resilience, especially in the US and UK. This monetary stance supports higher real yields