A global bond repricing points to deeper changes afoot

Justin Floor

The year has barely started, and it already seems on track to upend expectations and challenge the conventional wisdom.

2025 started with a pronounced spike in US bond yields, continuing a trend that has caught investors’ attention since the US Federal Reserve’s ‘bumper’ 50 basis point rate cut in September 2024.

Rising bond yields may point to a structural inflection
The rise in US bond yields is significant because they serve as a barometer for asset prices globally and are used as a yardstick of the risk-free rate. After declining from 1985, bond yields appear to have undergone a secular shift upwards.

Turning trend in bond yields?

Source: Bloomberg

Multiple factors are driving bond yields higher
The adjustment in yields have not proceeded in a linear fashion, and there are likely to be cyclical rallies from time to time (like those we saw recently). However, we note multiple factors that are driving bond yields structurally higher, and that investors need to be cognisant of. These include:

• There is growing consensus that inflation will be higher for longer and inflation expectations are also rising. (We have long argued inflation will be higher for longer. Refer to previous insights from our Angles & Perspectives Q2 2023 and Q2 2022.)
• Concern about the US fiscal position may also be putting upward pressure on yields. US national debt is approaching US$36 trillion (with nearly US$29 trillion held by the public), the federal budget deficit for 2024 is estimated at US$2 trillion, and total interest on the debt is expected to exceed US$1.1 trillion this year. Furthermore, President Donald Trump’s policies are also likely to be inflationary, as we highlighted in this video and the November 2024 PSG Angle.
• Changes in bond yields are not only driven by changes in interest rates, but also by changes in the risk and term premiums (the additional return investors require to tie up their funds further into the future). Recently, the term premium has started to rise, reaching its highest point in over a decade. In addition to factors already mentioned, escalating political risks may be driving the term premium higher.

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