A person pointing at the global bond market results on the display screen.

Warning signals coming from global bond market

Rising yields impact borrowing costs for governments, corporations

February 27, 20254 min read

Although the global bond sell-off that struck mid-January has quieted down, experts say it’s important not to ignore bond investors’ concerns about future inflation and growing government deficits.

At that time, bond yields in the UK and Japan were hitting highs not seen in years—and even decades—while the U.S. 10-year Treasury yield hit a 14-month high. Bond investors—sometimes called bond vigilantes—drive this longer end of the yield curve, and these high yields mean that they are demanding a greater return for the risk of investing their money for these longer durations, explained Steve Wyett, BOK Financial® chief investment strategist. In turn, this increases borrowing costs not just for the government, but also for corporations and homebuyers. In the U.S., when the yield on the 10-year Treasury rises, mortgage interest rates also tend to increase, as the 30-year mortgage rate is benchmarked to the rate on that note.

Some bond investors are concerned about how the Trump administration’s policies, such as those on immigration and tariffs, will impact the U.S. economy, including inflation, he noted. “The fact is that there's a higher degree of uncertainty now,” said Wyett. “Some of it may be because of fears of higher government deficits over the next 10 years; some of it is based upon concerns about inflation and economic growth.”

Central bank rate cuts, fiscal stability in question
If U.S. inflation rises again, that could be bad news for borrowers who have been anticipating more rate cuts from the Federal Reserve. Despite President Trump’s demands that interest rates drop immediately, the Federal Open Market Committee (FOMC) decided on Jan. 29 to hold the Federal Funds rate at a target range of 4.5 to 4.75%, where it has been since November. Looking forward, some analysts are predicting that the Fed will not cut rates at all in 2025—or may even hike rates later in the year—though the Fed Fund Futures market is still predicting at least one cut.

When interest rates go up, the value of bonds that investors currently hold goes down, though there’s less of an impact on shorter-term bonds than on longer-term bonds, Wyett said. Thus—when investors question whether central banks will have to pause rate cuts or hike rates—it sometimes initiates a bond sell-off, like what happened last month.

And it’s not just the situation in the U.S. that’s garnering investors’ concern. Japan’s 10-year government bond yield surpassed its highest level in 13 years, as the country continues to normalize its monetary policy amid questions of potential wage inflation and possible U.S. tariffs on Japanese imports, said Peter Tibbles, senior vice president of foreign exchange trading for BOK Financial.

At the same time, yields on the UK’s 30-year gilt—a bond issued by the UK government—hit the highest level since 1998 in mid-January, while yields on the 10-year gilt reached levels not seen since 2008. By driving yields to this level, bond investors were indicating that they think the UK’s economic growth projections for 2025 are too lofty, which means that government could have to raise taxes, cut spending or borrow money in the current high-rate environment by issuing more gilt--if the UK doesn’t hit these growth targets, Tibbles said.

“The gilt market has gone back to a little more normalcy now, but I think the sell-off was a warning signal to say, “Look, this is what could happen,’” he explained.

What rising yields mean for governments, corporations
When government bond yields rise because investors are demanding a higher rate of return, it costs the government more money to borrow, even if the central bank isn’t raising rates, Wyett noted. That, in turn, exacerbates concerns about the government deficit and government spending.

Meanwhile, yields on U.S. corporate bonds are always higher than on Treasuries—how much higher depends on the current credit spread—so rising Treasury yields also means it costs corporations more to borrow.

 

Graph showing high-yield bond credit spreads between 2019-2025.
Source for chart: Federal Reserve Bank of St. Louis

 

“Higher interest expenses ordinarily aren’t positive for corporate margins and, therefore, are not necessarily a good thing for stock prices, either,” Wyett said. However, that doesn’t always mean corporate spending—or the economy overall—will slow, he added.

Instead, the more important factor is why longer-term bond yields are rising, according to Wyett. For instance, if it’s because long-term inflation expectations are rising, that’s not positive for the economy. By contrast, if the yield curve is steepening because the outlook for economic growth is more optimistic, that is a good sign.

Growth is so important to the U.S. going forward,” he said. “The policy mix that we want to see needs to lead to faster growth—and that doesn't mean inflation has to go way back up.”


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