Oil and global bond yields rise

On Thursday, the European Central Bank raised its policy rate by a further 25 basis points, as expected. German short-dated yields moved higher, reflecting the prospect that monetary policy may need to remain restrictive for longer (meaning that policy rates would have to remain at sufficiently high levels to bring inflation down). At the same time, country selection within euro government bonds remains important. French sovereign spreads (the additional yields on French government bonds over German government bond yields) have risen again on renewed concerns about the country’s fiscal trajectory, while Italian and Spanish spreads have remained relatively resilient.

The oil price continues to grind higher amid renewed tensions in the Middle East. This is adding to inflation concerns, pushing yields higher and putting pressure on bond markets globally (when bond yields rise, bond prices fall). The impact is particularly relevant for Europe, given its greater dependence on imported energy and the risk that a higher oil price feeds into broader inflation expectations.

Beyond the short-term volatility surrounding economic data and central bank meetings, structural forces are also keeping long-term yields elevated. The US and several European governments continue to issue large volumes of debt to fund fiscal deficits and refinance maturing bonds. In the current environment of rising bond supply, fiscal uncertainty and geopolitical risk, investors are demanding a higher term premium – additional compensation for holding longer-dated bonds.

The rapid buildout of AI infrastructure is adding to financing demand. Governments and companies are increasingly competing for the same investor capital, raising the question of the yield levels required for markets to absorb this growing supply. The elevated 30-year US Treasury yield therefore reflects more than just expectations for the Federal Reserve’s next rate move. It mainly reflects concerns about fiscal discipline and refinancing needs, as well as the willingness of investors to commit capital for several decades.

In this environment, we are cautious about buying bonds with overly long durations (duration: interest rate sensitivity). Recent market volatility illustrates how quickly rate expectations can shift, while the long end of the curve remains exposed to supply and term-premium risks. We continue to favour intermediate maturities and high-quality (investment-grade) corporate bonds, where solid corporate fundamentals provide a more balanced risk-return profile.