Over the past few weeks, bond market yields on long-dated government debt have risen to levels not seen since the eve of the 2008 financial crisis.
The US 30-year Treasury yield briefly touched 5.2% — the highest since 2007. UK 30-year gilts hit yields not seen since 1998.
So what’s actually happening, and should you be worried?
What’s driving yields higher?
The immediate trigger is oil. The conflict in Iran has choked off traffic through the Strait of Hormuz, pushing Brent crude above $110 a barrel. That’s sent inflation expectations rising again, just as central banks in the US, UK and Europe were hoping the job was done.
Markets have reacted swiftly: traders are now pricing in the possibility of interest rate hikes rather than cuts in some major economies, and expectations for near-term rate reductions have been largely abandoned for 2026.
There’s a longer-term structural story too. Governments are borrowing a lot of money. The United States in particular is running large budget deficits. Investors who are being asked to lend for 30 years are beginning to demanding better terms. So the iron law of bonds is being reasserted: when yields go up, prices go down.
Why does yield go up when prices go down?
When you buy a government bond, you’re lending money in exchange for a fixed stream of interest payments. If you pay €100 for a bond that pays €4 a year, your yield is 4%.
But if the price of that bond falls to €80 on the open market – perhaps because investors are dumping it – the same €4 annual payment now represents a yield of 5% to whoever buys it at the lower price.
This is why the dramatic sell-off in bond markets has hurt investors who already hold bonds. The value of their holdings has fallen. In mid-April, the UK sold 10-year gilts at a yield of 4.92% – the highest rate since the height of the global financial crisis in 2008.
To put that in perspective: AIB, Bank of Ireland and PTSB are willing to lend many Irish homeowners money for a lower interest rate than the global investment community will lend to the UK government.
What does this mean for Irish investors?
Most Irish investors hold bonds indirectly, through diversified funds or pension portfolios. The pain in bond markets over the past 18 months has already been felt in the form of modest or negative returns from the fixed income portion of balanced funds.
If you’ve looked at your pension statement and wondered why the “safer” assets seemed to be dragging performance, this is a significant part of the explanation.
Is now a time to buy?
As yields rise, there will likely come a time when bond returns become attractive relative to the risks and returns available in other asset classes such as equities.
But there may be more pain to come first. A Bank of America survey published this month found that 62% of global fund managers expect the 30-year US Treasury yield to reach 6%. If that happens, it would mean further losses for existing bondholders before any recovery.
By historical standards, bonds are currently yielding considerably more than they have for most of the past fifteen years – a period during which central bank policy kept rates pinned near zero. For most of the 2010s, locking in a 1% or 2% return on government debt was the only option available. Today, yields of 4.5% to 5% on government debt are on offer.
So the case for gradually increasing exposure to high-quality bonds over the coming months is building. If inflation moderates, the investors who locked in today’s yields will look well-positioned in hindsight.
For most investors, the practical approach is not to make an aggressive call on bond markets, but to ensure your portfolio isn’t systematically underweight fixed income at a time when bonds are actually paying their way again. A diversified bond fund, or the fixed income portion of a multi-asset fund, is the most sensible way to get that exposure without taking on the risk of any single issuer.
The old cliché about bonds is that they’re boring. A bit of boring might soon be welcome in the bond market.
