MACRO EXPLAINER: The global bond sell-off

Why yields are rising, why it matters, and what investors can do about it

What?

Global bond yields have been rising for months and in many countries are at the highest levels since the 2000s.

In the US the 30-year bond yield reached 5.33%, its highest level since 2007.

It’s not just the US where yields are rising – UK yields are at the highest since 2008 and yields in Europe have also risen in lockstep  

Why?

The higher yields reflect the changed economic environment we are now in.

Remember when government bonds had a negative yield? That was last decade - when governments were spending less and companies were investing less.

Now we have much higher government deficits around the world (more spending on defence, fiscal supports from the cost of living crisis and infrastructure) and, with AI, much greater capital expenditure from large businesses. That means there is now much greater competition for capital, which is pushing up borrowing costs.

So What?

Bond yields move inversely to price, so when yields are rising it means bond prices are falling. That means investors holding bonds are losing money on those holdings.

Also, if bond yields rise a lot, historically, that has often raised big concerns about the economy and the stock market could fall more considerably.

That’s because higher bond yields mean it’s more costly to borrow and invest. Higher bond yields also increase debt service cost meaning in theory governments have less spare money to invest in other items like defence or infrastructure - that's also negative for growth.

This matters even more because investors have traditionally relied on bonds to provide protection when equities fall. But in recent years that relationship has become less reliable, with bonds and equities sometimes falling together.

What Happened This Week?

This week US Treasury Secretary Bessent announced they would buy back some long term bonds, claiming liquidity was poor in the market and also the price didn't reflect fundamentals.

Initially yields fell and prices rose as the buyback would mean more demand and less supply. The effect has been short-lived as the amounts involved are not huge and investors are sensing that maybe the US is starting to panic about its high borrowing costs.

Why Does This Matter?

What happened is significant because gold prices rose and the US dollar was sold off.

That kind of price movement is often a sign that investors saw this move as lacking credibility.

One reason for that is that if the US is issuing fewer long-term bonds, it will instead issue more short-term bonds called T-Bills. The interest on T-Bills is tied more closely with what the Fed does.

That means the pressure will be on Kevin Warsh not to raise interest rates.

Effectively the market senses that the US may be becoming more worried about managing its debt cost than managing inflation - in the markets that's called "fiscal dominance" and it's not a good thing.

Now What?

Putting all of this together means it's not a case of not investing in bonds - the higher yield means that if you buy a bond now and hold it to maturity you will likely earn a higher return than if you had invested in bonds 10 years ago.

But, and this is a big but, if yields rise further in the short term, you will have losses on these bonds on a mark-to-market basis (i.e. the bonds will get cheaper). Plus, if you are building a portfolio you can't only rely on bonds to hedge equities.

From our perspective that means having a smaller core allocation to bonds. We also invest in strategies that actively trade bonds – what we call adaptive strategies like trend following.

These strategies adjust exposure depending on market conditions and are currently short bonds because the price trend is for lower prices at the moment. We don't know how long the trend will continue, but one of the features of markets is that these trends often go on longer than expected. At some point the trend might change, e.g. if economic growth really started to weaken, and the position will be adjusted but that hasn't happened yet.

The Bottom Line

What happened this week matters because fiscal deficits are increasingly becoming a driver of markets. Bond yields themselves are not unusually high by historical standards.

What is unusual is the level of government debt, the associated debt-service burden, and the increasing focus of policymakers on keeping borrowing costs under control.

We have written before that we believe we are in the midst of a regime change. This week provided another example.

For investors, that means building portfolios that don't depend on any one economic outcome. Diversification still matters—but increasingly, so do resilience and adaptability.