Why Global Bond Yields Are Surging

Allison Nathan (0:05)

Bond yields around the world have been rising for most of this year and have recently surged. So are interest rates settling into a new higher normal, or is this a temporary dislocation? I'm Alison Nathan, and this is Goldman Sachs Exchanges.

To understand why bond markets are under pressure giving rise to higher bond yields, I'm sitting down with my colleague George Cole, who leads the European Rate Strategy for Goldman Sachs Research. George joins me today from London. George, welcome to the program.

George Cole (0:35)

Thanks very much.

Allison Nathan (0:36)

So George, it's easy to look at the headlines and think this is just a US story. We've obviously seen concern about inflation here in the US. There's concern about spending levels, but this bond sell off is really happening everywhere. Is that right?

George Cole (0:50)

Yeah. No, that's right. So as you said, I sit over here in London. I look primarily at the European bond markets in Germany, in the UK.

But when we look at the US, when we look at markets like Japan, we would really think of these four as the major government bond markets, the major benchmarks for the global economy and global fixed income markets. And we're seeing all of these markets move higher in yield. We're at multi-decade highs. As we read about in the financial press, we're seeing yields pressing higher across all of these economies. And it doesn't look obvious that there's a single driver or a single market that is really leading the sell-off or driving it over a long period of time. From day to day, one move might be bigger in one of those economies, but really over the last few months, all of those markets have been pushing yields higher.

Allison Nathan (1:38)

Well, that's my follow up to you, George, because the question is, what is driving this? And my intuition would be the rest of the world is just following the US lead. But you're saying that may not be the case. Every country might be dealing with their own issues?

George Cole (1:52)

Yeah, so as a rate strategist and as an economist, we'd be looking at yield curves and bond markets to try to think about and find clues, what is driving the move? We could look which economy might be driving it. As I said, it's not that obvious that you can point to just one of those major bond markets as driving the sell-off. You could look at things like the shape of the yield curve.

Maybe it's the front end of interest rate curves that is moving. That would be associated with expectations around policy rates that might be on the move, maybe reflecting cyclical conditions, better growth, higher inflation. It could be maybe the long end of the curve is moving. That could be a term-premier type of issue. The price of duration risk, maybe fiscal risks or maybe even long-term growth further out the curve. And what we're seeing across the yield curve is that all the way from the 30-year point on the curve, which has got a lot of attention, and yields are much higher there than they have been in recent decades. But all the way down, the 10-year point on the curve, and even the policy rate expectations or pricing one or two years out is looking much higher.

Maybe not right at the peak of where we were in 2022, but certainly very high relative to where we've been in recent years. So it looks like we've got broad base pressure across a range of different factors.

Allison Nathan (3:16)

And so what are then the fundamental drivers or are there not? What do you attribute all of this movement to?

George Cole (3:23)

I'm glad you asked, are there fundamentals behind it? And this is one of the features of this sell-off, I think is a little underappreciated when you might read about it, is that actually the volatility of the moves have been relatively low. Now, of course, we're dealing with the revision right now of central bank expectations, and we're maybe moving toward an expectation that rates will be moving higher from central banks. That's now inducing a little bit of volatility in the market. But if we go back to, say, July, and think about the move since then in yields higher, what has been really striking is that volatility has been low, both the realized volatility of the market and also the price of volatility, the implied volatility that is priced into the market as well. Now, we might be a little bit higher in the range of the year, but if you look at on a multi-year horizon, volatility is actually quite low. And that feature of this sell-off makes it much harder to argue, well, this is a non-fundamental move. This is happening because of some sort of technical reason or a move in the market that has outsized volatility that is not sustainable. When volatility remains low, it is harder to make that conclusion. What I would say is that there is an overlapping set of fundamentals here that are driving yields up. And that goes all the way from long-running themes like large deficits, fiscal policy that is driving debt levels to historic or recent highs. We've had that since the pandemic. Now, that's not always and everywhere a guide to what markets do.