Structural Forces Push Bond Markets Higher as Yields Raise Global Risks

Global bond markets are under pressure as persistent inflation, rising government debt and other structural forces push interest rates higher, raising concerns for economies and asset prices, according to an analysis by the Australian Broadcasting Corp. (ABC).

Rising government bond yields are adding pressure to borrowers and financial markets as investors reassess inflation, debt and geopolitical risks. [Photo: Reserve Bank of Australia X]

Inflation in Australia and elsewhere has not fallen as quickly as hoped, increasing the risk that interest rates will need to remain high or rise further.

Higher borrowing costs can put pressure on property, shares and other assets and increase the risk of an economic slowdown. However, higher rates do not automatically mean asset prices will fall.

The bond market provides an important gauge of borrowing costs and investor expectations about inflation, interest rates and credit risk.

The yield on Australia's 10-year government bond has climbed to a 15-year high, while 10-year US Treasury yields have reached their highest levels since the period surrounding the global financial crisis.

Investors have also been reassessing their exposure to US government debt and the dollar.

The Reserve Bank of Australia reduced its target allocation to US dollars in its foreign-reserves portfolio from 55% to 45% during 2024-25, returning the allocation to its 2012 level.

The RBA said the US dollar remained its largest allocation because of the depth of US dollar currency and asset markets.

Author and former banker Satyajit Das has described the US economy as a critical “stress point” for the global bond market. Deutsche Bank macro strategist Lachlan Dynan has also pointed to renewed questions about the appeal of US dollar reserves and Treasuries amid concerns about the US fiscal position.

The Netherlands' central bank, De Nederlandsche Bank, has also moved gold held in the United States and Canada as part of an effort to strengthen its crisis preparedness amid geopolitical uncertainty, according to ABC.

Meanwhile, Norges Bank Investment Management, which manages Norway's roughly US$2.3 trillion sovereign wealth fund, has proposed reducing the share of government bonds in its benchmark bond index from 70% to 50%.

Under the proposal, the fund's US Treasury allocation would fall from 34.1% to 21.9% of the government-bond component.

The move is primarily framed as diversification and portfolio management rather than an outright rejection of US government debt.

ABC also identified a range of longer-term forces contributing to higher bond yields, including heavy government borrowing, defense spending, the transition to a lower-carbon economy, infrastructure investment and the enormous amount of capital being committed to artificial intelligence and data centers.

Commonwealth Bank head of markets and rate research Adam Donaldson said these “very big structural forces” were pushing interest rates and bond yields higher.

He argued that the combination of AI investment, defense spending, infrastructure requirements and fiscal pressures could raise the neutral interest rate—the level consistent with stable inflation and a balanced economy.

The implications extend beyond bond investors. Higher long-term yields can increase borrowing costs for governments, companies and households, while also affecting the valuation of stocks and other assets.