From the studio

Podcast: Ulrike Hoffmann-Burchardi's Signal over Noise, on Apple and Spotify (5 mins)
Podcast: Jump Start | The Middle East, rising yields, and AI earnings (6 mins)
Video: Deep Dive | Fed policy outlook and fixed income opportunities (8 mins)
Video: Investors Club | What the Trump-Xi meeting means (9 mins)

Thought of the day

Rising government bond yields globally have gripped markets at the start of the week, as inflation concerns intensified amid a lack of progress between the US and Iran in ending the conflict. Japan’s 30-year yield hit a record high near 4.2% on Monday, after the 30-year US Treasury yield on Friday settled at the highest level since 2007, near 5.13%. The yield on 30-year German government bonds is at its highest in 15 years, while the 30-year UK yield has risen to its highest level in 28 years.

These moves in yields came as US President Donald Trump’s visit to China did not lead to any resolution on reopening the Strait of Hormuz, the latest inflation data from the US and Japan were stronger than expected, and UK Prime Minister Sir Keir Starmer faced mounting pressure to step down. Markets now expect the Federal Reserve to raise interest rates by 25 basis points in the next year and see the Bank of Japan continuing to raise rates to above 2%.

Yield volatility is likely to pick up further the longer the Strait of Hormuz remains closed, with markets pricing the upside risks to inflation and tighter monetary policies across the world. But we maintain the view that quality bonds offer an appealing risk-return profile given the two-sided risks on inflation and growth. We also do not expect higher yields to derail the current equity rally.

Growth risks remain a consideration for central banks. We believe that the bar for a Fed hike is high, particularly when the current policy rates remain modestly restrictive, and as new chair Kevin Warsh appears inclined to look through tariff or oil-induced one-off supply-shock inflation. For the European Central Bank, we note President Christine Lagarde’s vigilance over growth risks alongside inflation worries. Indeed, in a scenario where the Strait remains blocked for a prolonged period, downside risks to growth could lead to rate cuts across major central banks. Separately, in the UK, we believe the likelihood of any new government pursuing an overly expansive fiscal path that unsettles markets is low. And for Japan, the government is expected to deliver a fiscal consolidation plan in the next month, while higher tax revenues should also improve the country’s fiscal fundamentals.

There is likely to be sufficient demand for bonds to stabilize yields. While the US Treasury’s bond auctions last week drew less overall demand than expected, rising yields should start to attract incremental demand and help stabilize yield volatility. In fact, foreign bids in the 30-year auction were considered robust, suggesting that international investors may be stepping in to lock in attractive yields. Additionally, with shorter-dated yields becoming appealing relative to cash or deposits, we think this could create an anchor for yields and limit some upward pressure. Overall, we believe capital markets have sufficient capacity to fund additional supply.

Equity markets should withstand higher yields amid solid growth. Some consolidation in the equity market should not come as a surprise after its seven-week rally, but we also do not expect higher yields to derail the positive outlook while growth remains resilient. While potentially higher interest rates may dampen consumer spending at the margin, they are unlikely to curtail long-term government and corporate spending that underpins growth and company profits. Historically, it typically takes a sequence of hikes for the equity market to falter, and data shows that stocks have not traded much differently into a first hike than in any other period. We expect the Fed to keep rates steady in the near term as it assesses the trade-offs between inflation and growth.

So, while near-term yield volatility may keep markets on edge, current attractive yields and growth risks point to an appealing risk-return profile for short- and medium-maturity quality bonds, in our view. We also maintain our positive outlook on global equities, and recommend investors hold a diversified exposure across sectors and regions.