Did you know that the global bond market is larger than the global equity market? According to the Sifma Capital Markets Fact Book, the bond market is currently valued at almost US$161 trillion, while the public equity market comes in at about $158 trillion. The bond market includes corporate bonds, but the bulk of it comprises sovereign bonds – essentially IOUs issued by governments on loans received. The US$161 trillion is what bond issuers (governments and corporations) owe to investors holding their bonds, including pension funds, asset managers and banks around the world.
While the equity market attracts the most attention in the media and is typically foremost in the minds of retail investors, the bond market quietly supports the global financial edifice. Far more stable than stocks, bonds are nonetheless susceptible to forces and shocks that have far-reaching effects, and for this reason economists and financial analysts keep a close eye on them. While equity investors closely watch stock prices, those interested in bonds watch yields.
The yield on a bond is the interest paid to the bondholder expressed as a percentage of its unit price. This depends on what the bond sells for on the secondary market – when bond prices fall, yields rise, and vice versa.
Interest rates and inflation are the main determinants of bond yields, and analysts have seen an uptick in all three in the past few months, driven by a number of factors.
Andreas Tindlund, fixed income fund manager at Abax Investments, says the rise in global bond yields is not simply another short-term market shock. “It reflects a world in which demand for capital has increased while many of the forces that once held inflation and interest rates down are reversing,” he says
“Governments are borrowing more to fund defence, energy security, climate adaptation and ageing populations. At the same time, tariffs, trade restrictions, tighter migration policies and geopolitical conflict are making the global economy less flexible and potentially more inflationary,” Tindlund says, also citing competition from the corporate bond market introduced by the AI “hyperscalers” in the US, which are borrowing massive amounts to fund AI-related infrastructure.
However, the immediate catalyst for the latest selloff, he says, has been “a combination of higher oil prices, concern about government debt and expectations that central banks may have to keep interest rates higher for longer”.
Tindlund says rising sovereign yields look increasingly like a global repricing of capital, and for this reason South African government bonds are vulnerable. “If real interest rates rise in the US, Europe and Japan, South African bonds cannot be completely insulated from that process, even when local conditions are improving,” he says.
As usual when it comes to the global financial markets, the US is at the centre of the action. Higher bond yields translate into higher servicing costs on the US government’s $40 trillion debt pile. The temptation for the US Federal Reserve Bank, headed by its new governor Kevin Warsh, is to keep interest rates low, but inflation may intervene…
Warren Buys, senior wealth manager and investment committee member at Private Client Holdings, says the Trump administration is keen for Warsh to reduce interest rates. But that could backfire. “A US Fed that is seen to have lost its independence will be a very negative sign for investors,” Buys says. The recent move by US Treasury Secretary Scott Bessent to stem rising yields through a bond buy-back was viewed with suspicion by investors.
Buys says inflation in the US is currently 3.4%, which is above the Fed’s target of 2%. “Although it seems pressure is mounting on Warsh to increase rates, our expectation is for the Fed to leave rates unchanged at this stage, and that really needs to be viewed in the context of global geopolitical competition rather than cooperation. Bringing inflation back to 2% is far from the US administration’s top priority at this stage,” he says.
He believes that the overall rise in bond yields is, in fact, part of a “normalisation process from the unsustainably low yields we have seen over the last few years”.
Nolan Wapenaar, Head of Fixed Income and Co-CIO at Anchor Capital, also suggests this might be the case. “There is a reasonable argument that perhaps what we are seeing today is not the beginning of a bond-market crisis, but an overdue normalisation in yields. Leading up to the Covid-19 pandemic, global rates at 1% for a decade did not make sense with growing economies.
“If this is the case, then it is a massively bullish indicator for global markets. For the first time since the 2008 global financial crisis, the global economy appears able to withstand normal interest rates, while continuing to grow at 2% to 2.5%. This is quite a remarkable and positive development. The downside to this argument is that we need to decide what the new normal is for interest rates, and we may well have quite a bit of adjustment to go,” Wapenaar says.
