Summary
Global bond yields rose sharply from September 2024 to January 2025, driven mainly by higher term premia – the extra return investors require for holding longer-term bonds. Since then, roughly half of this increase has reversed as term premia have declined. While global factors primarily drove yield movements in late 2024, recent shifts have been more influenced by country-specific dynamics—particularly the sharp decline in US bond yields since January 2025 and the more recent movements in Germany.
Nominal bond yields can be decomposed into expected short-term rates and term premia. As both are latent variables, this partition requires an explicit modelling approach. Analysis from Fulcrum’s suite of models indicates that the rise in US bond yields from September 2024 to January 2025 was driven by both factors, with term premia playing a dominant role. The subsequent decline from January to March 2025 was attributed to a reversal of this term premia increase, influenced by weaker economic data and global risk aversion. Global factors contributed to broad yield increases across markets in late 2024, while idiosyncratic influences drove more recent divergences—such as US yield declines amid slowing growth and policy uncertainty and surging German yields that came after news of higher defence spending.
Longer-term shifts in bond markets reflect structural changes in monetary and fiscal policy. Central banks, including the Federal Reserve, European Central Bank, and Bank of England, have been steadily reducing the size of their balance sheets, increasing the effective supply of government bonds to the private sector. At the same time, foreign central banks have diversified away from US Treasuries, reducing demand. With fiscal deficits remaining elevated across major economies, sustained debt issuance is expected to keep upward pressure on yields and term premia. However, the effects of quantitative tightening are likely to be more gradual than those of quantitative easing, with the private sector playing a larger role in absorbing new issuance.
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