Global bond yields have surged, with Japan's 10-year benchmark reaching 3% and the U.S. 10-year Treasury yield hitting 4.78%, its highest since early 2025. This sell-off is largely attributed to a reassessment of Federal Reserve policy, with markets pricing in potential interest rate hikes in the U.S. and Japan this month, as well as in New Zealand and Europe. Andrew Lilley, chief rates strategist at Barrenjoey, suggests the Fed may initiate a cycle of at least three rate hikes.
The rise in real yields is not primarily due to an inflation scare, despite increased energy prices and Middle East conflict pushing Brent futures above $91 a barrel. Instead, market-based measures of medium-term inflation expectations have actually decreased. The entire repricing has occurred through real yields, with the U.S. 10-year real rate approaching 2.5%, indicating a healthier economy and a shift away from the ultra-low neutral rates of the 2010s. Franklin Templeton notes that this represents genuinely attractive compensation for a risk-free asset.
While the bond sell-off has been painful for holders, it means fixed income now offers compelling real income, diversification, and relative value. The spread between the U.S. 10-year real yield and the S&P 500 dividend yield is at its widest since the early 2000s, making bonds competitive with other major asset classes for the first time in over two decades. Nuveen's Head of Fixed Income Strategy, Tony Rodriguez, is among those who believe the rise in real yields has further to run.
