Morning Bid: Bonds’ reality check

Bond yields reached multi-decade highs this week, driven by factors such as rising deficits, elevated inflation, and increased issuance of AI-driven corporate debt. The U.S. 10-year Treasury yield surged to roughly 4.80%, its highest point since 2021, as bond traders demanded higher compensation for holding longer-term government debt.

This trend was observed in developed markets worldwide, with Japan's 10-year bond yields surpassing 3% for the first time since 1996, Germany's 10-year Bund yields hitting a 15-year high, and French 30-year bond yields reaching almost a two-decade peak. While some of these moves have since softened, many analysts believe the current bond market volatility is far from over.

Treasury Secretary Bessent noted that the U.S. 10-year term premium – the additional yield investors demand for longer-dated debt – is lower than in Japan or Germany, suggesting that the current rout is not primarily driven by concerns about the U.S. fiscal situation. Instead, the sharp bond yield moves may be a recalibration of the neutral rate, with the AI investment boom and other factors putting upward pressure on the rate that neither stimulates nor inhibits economic growth.