Global bond yields are rising due to a confluence of factors, according to Daniel Morris, Chief Market Strategist at BNP Paribas Asset Management. While some initially attributed it to low August liquidity, fundamental forces are at play. Headlines have focused on inflation and government debt sustainability, but Morris suggests these are not the primary drivers. Higher oil prices linked to the Middle East conflict initially contributed to inflation, but their impact has recently waned. Instead, the market's forecast for the long-run fed funds level, now at its highest since 2011, and the uncertainty surrounding the new Fed Chair Kevin Warsh's communication style, are considered more significant factors, pushing US Treasury term premia higher.
Morris dismisses concerns about government debt sustainability as a new catalyst for the bond sell-off, noting that while debt levels have increased since the 2008 financial crisis, the US budget deficit at 6.9% in Q2 is not unusually high by post-GFC standards, and interest costs at 16% of government expenditures are below 1980s levels. Instead, a more plausible factor is the significant increase in corporate debt issuance. By the end of July, corporate credit issuance reached $1.6 trillion, representing a $225 billion (22%) increase from the same period in 2025. Approximately $200 billion of this issuance is attributed to hyperscalers, and to absorb this volume, investors must reduce holdings of other assets, consequently pushing up yields. Given the high credit ratings of 'MAMA' companies (Meta, Alphabet, Microsoft, Amazon), this demand shift could also impact US Treasuries.
The impact on equity markets has been minimal so far, with the MSCI All Country World IMI gaining 1.8% since late June. However, there's a clear divergence: value-oriented indices, such as the US Russell Value index, have gained 5.2%, and non-tech emerging market stocks are up 2.2%, while technology stocks, particularly the Nasdaq 100, are down -1.9%. Emerging market tech stocks have seen an even steeper decline of 11.1%. While higher rates can impact tech stocks due to the longer duration of their earnings, they tend to recover quickly once priced in, as superior earnings growth kicks in. Despite slightly higher financing costs, corporate balance sheets are generally healthy, and companies are expected to manage these costs due to positive earnings outlooks.
BNP Paribas Asset Management's Chris Iggo also notes that US Treasuries face a challenging second half of the year due to inflation risks, fiscal uncertainty, and an unclear Federal Reserve policy outlook, which will keep long-term borrowing costs elevated. He suggests investors remain constructive on equities and high-yield credit but avoid significant positions in long-duration government bonds until inflation and monetary policy clarity improves. Iggo also cites potential policy risks from the November elections and skepticism among investors regarding Congress's ability to set a sustainable fiscal policy. He concludes that risk assets in developed and emerging markets, including equities and high-yield credit, remain appropriate given the global economy's decent shape, strong manufacturing activity, and healthy service sector indicators, despite ongoing worries like El Niño, European heatwaves, and political uncertainty.
