Yields Pushing Higher

Global bond yields are rising for several cyclical and structural reasons, but the immediate evidence does not yet point to a sovereign debt crisis.

• The 10-year U.S. Treasury yield is approaching 5%, Canadian yields are close behind, and global government debt-service costs are about $2 trillion; a Bloomberg survey identifies accelerating inflation, fiscal concerns and term premiums, hyperscaler debt issuance, and Fed expectations as the main concerns.
• Inflation remains persistent but mixed: U.S. wage growth has normalized and core CPI and services inflation have slowed, while U.S. diesel prices are above $6 per gallon because of supply disruption around Hormuz, with tariffs creating an additional risk.
• Fiscal expansion is a concern, but it does not fully explain the synchronized rise in yields because Canada and Germany have stronger fiscal positions than the United States; hyperscaler issuance is increasing but remains small relative to government borrowing and global liquidity is ample.
• Central-bank repricing is also lifting yields: the ECB has raised rates, markets are pricing possible Fed and BOJ hikes, and U.S. nominal GDP grew at a 6.6% annualized rate in Q2, making higher yields compatible with stronger growth.
• The appreciation of the yen as Japanese rate-hike expectations increased may be forcing carry-trade investors to unwind positions and sell U.S. Treasuries; meanwhile, recent 10-year and 30-year auctions cleared at somewhat higher yields but attracted stronger bid-to-cover ratios.

Takeaway: Purpose remains underweight bonds with mildly lower duration, but the risk-reward balance has improved near the upper end of the four-plus-year yield range; higher starting yields should support better forward bond returns, although the eventual debt crisis is more likely to begin in a financially fragile economy than in Canada or the United States.