¿Por qué están tan altos los rendimientos de los bonos?

The most prominent story of financial markets in 2026 is the increase in the costs of public financing. The average rise in the yield of 10-year sovereign debt among G7 countries has been one percentage point, which has posed a significant challenge for finance ministers. The main question is why yields have risen so much. Could it be that investors demand higher compensation for perceived unsustainable fiscal positions?

Does it reflect expectations of much faster growth? Is there a global war for investment funds and limited lending sources? Did Iran set the stage for persistently high inflation? Is it simply that central banks signaled the need to maintain higher short-term interest rates, and markets are simply replicating that message? Have monetary policy makers lost credibility in their fight against inflation?

Or could it be that bond markets are now dominated by agile hedge funds that can make huge profits if they manage to impose a negative narrative? Each answer has its own merits. At a September press conference, Federal Reserve Chairman Kevin Warsh pointed to three general reasons: the strength of the U.S. economy, competition for capital, and complex geopolitics.

However, the most relevant point he made was that explanations for bond yield variations tend to be over-determined. In other words, there are numerous theories competing with each other that are impossible to prove. This is accurate. For instance, one could argue that short-term interest rate expectations have changed, but these measurements are extremely volatile and often incorrect.

Perhaps investors require a higher compensation for holding long-term debt (a rising long-term premium). Again, long-term premiums cannot be measured with precision. The New York and San Francisco Fed estimate the long-term premium on U.S. sovereign debt daily, yielding wildly different results. The New York Fed tends to report that the long-term premium for U.S. 10-year debt has fallen this year, whereas the San Francisco Fed claims it has increased.

Warsh is correct in referring to general terms about what markets convey. So, what can we confidently assert? Central banks have largely maintained their credibility in the fight against inflation. The difference between nominal bond yield and inflation-linked bond yield provides an estimate of market expectations for inflation.

Ignoring the fact that bond-linked inflation instruments have little depth in some countries, the implied long-term inflation expectations derived from this analysis point to encouraging results for central banks: their credibility in fighting inflation remains intact. Market expectations for long-term inflation over the five-year period beginning within five years (i.e., 2031-2036) have remained stable in general and close to the central bank's objective in most advanced economies.

Notably, the United Kingdom stands out in this aspect, primarily due to the difference between the inflation measure used to adjust the value of its sovereign bonds and the inflation measure taken as reference by the Bank of England for its objective. Market inflation expectations for the five-year period starting within five years (i.e., 2031-2036) have shown volatility this year due to the Iran conflict.

However, the highest yields in the United Kingdom suggest that the BoE may need to be concerned, as it appears to have less credibility compared to other central banks. To keep inflation under control, central banks are expected to set higher interest rates. There is no doubt that short-term interest rate expectations have increased in advanced economies.

At the beginning of the year, it was expected that the Fed would cut rates down to close to 3%, but now it is expected to raise them to 4.75%. This represents a drastic change. Similar variations in the expectations of official interest rates have occurred in other countries as well. This is clearly an important underlying factor explaining the increase in bond yields.

The complex geopolitical situation and rising oil prices play a significant role. The most evident cause of the increase in bond yields was the decision by former President Donald Trump to initiate a war with Iran. Before that, yields fell. They moderated when tensions decreased in June, but they have risen again since then, in line with the intensity of the conflict.

These movements suggest that investors expect central banks to set higher interest rates to keep inflation under control amid significant geopolitical tension and volatile, high energy prices. Could markets simply be repeating the signals sent by central banks? It is a possibility. Recent research by Paul Beaudry, Paolo Cavallino, and Tim Willems has found a link between fluctuations in long-term yields since 2020, U.S. non-agricultural employment data, and central bank speeches.

While there is no doubt that central banks have adopted a more restrictive stance this year, it is risky to assert that the increase in yields is due solely to statements by officials. Indeed, both the Fed and the European Central Bank have tried to moderate this increase.