The bond market is currently undergoing a rapid repricing, with velocity and momentum extending far beyond historical volatility averages. This surge in yields across G10 sovereign debt has triggered massive capital losses, even in supposedly low-risk government bonds.
Since late February 2026, the 10-year UK Gilt yield surged from approximately 4.2 percent to an intraday high of 5.2 percent, while 30-year Gilts climbed from 5.0 percent to over 5.8 percent. In the US, the 10-year benchmark Treasury yield expanded from 4.0 percent to over 4.6 percent. For 30-year US Treasuries, the spike from 4.6 percent to 5.2 percent marked the highest level since July 2007. Even in Japan — long perceived by market participants as a permanent low-interest-rate regime — the 10-year JGB yield advanced from 2.2 percent to 2.8 percent, while the 30-year yield skyrocketed from 3.2 percent to 4.1 percent.
These historic shifts in yields are driven by three fundamental catalysts. They underscore why we believe the risk-reward profile of long-duration bonds remains unfavorable, and why we maintain our risk-off stance in fixed income.
1. With US national debt exceeding $39 trillion, debt servicing costs have surpassed the defense budget. At the same time, there is still no sign of effective spending discipline in the United States, given a structural budget deficit of around 6 percent of gross domestic product. With increasingly serious consequences: While the war in the Middle East is driving up U.S. government spending, Trump’s trade disputes continue, inflation at the gas pump is eroding the purchasing power of U.S. citizens, and the Federal Reserve’s independence is suffering from attempts at political influence, major global players are simultaneously reducing their holdings of U.S. Treasury bonds: China, for example, reduced its holdings from over one trillion to less than 700 billion U.S. dollars. For the U.S., this development comes at an inopportune time. The issuance volume of new government bonds must be scaled up to finance a growing debt burden. Conversely, reduced demand from major global creditors during new auctions could create a structural demand vacuum. This would force yields higher to tap new private sources of capital, potentially driving the interest-to-GDP ratio even higher.
2. The Bank of Japan’s shift in monetary policy to curb inflation continues to act as an additional catalyst in international bond markets. When 30-year Japanese government bonds offer yields of over 4 percent, the economic rationale for the yen carry trade that has been conducted for decades diminishes (see the GANÉ Express of November 21, 2025). Japanese institutions, which have historically been the world’s largest net buyers of foreign fixed-income securities—making Japan the United States’ largest creditor currently — are once again seeing domestic yen-denominated bonds as an attractive alternative without foreign exchange risk for the first time in decades. The feared withdrawal of liquidity is contributing to volatility spikes in Western bond markets, as the international financial system risks losing one of its most critical “marginal buyers” at the long end of the curve.
3. The rise in raw material and energy costs, driven by geopolitical conflicts and supply chain disruptions, is fueling inflation and hitting parts of the real economy hard. Consequently, default rates on corporate bonds are rising in the high-yield segment—the segment with the highest risk—particularly among capital-intensive industrial companies in Europe, which is dependent on energy imports. If raw material and energy costs account for a significant portion of production costs (in some cases 30 percent or more), the inflationary environment leads to an immediate squeeze on already tight operating margins and, consequently, to an increase in the refinancing and default risks associated with debt instruments. In the high-yield segment, risk premiums—known as credit spreads—still do not adequately reflect these risks.
From an asset allocation perspective, therefore, neither the current yield curve nor the currently low risk premiums on corporate bonds offer an adequate term premium to justify taking on higher risk. To offset the significant interest rate and inflation risk associated with a long-term commitment, the yield curve would need to be significantly steeper. Compounding the issue, market expectations for swift rate cuts under the new Fed Chair, Kevin Warsh, may prove premature given the renewed uptick in US inflation. The current macroeconomic backdrop therefore continues to support a strategic preference for high-quality, highly liquid, short-duration bonds.
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