Bond market is sending out distress signals, but investors don’t need to panic

Vijay Valecha , June 6, 2025, The National

Investors tend to fixate on the stock market, but there are times when the bond market cries out for our attention, too.

That’s definitely the case today, because it’s sending out distress signals. The global bond market is actually the bigger of the two, worth about $140 trillion, compared with $115 trillion for equities.

And when bond yields surge, the ripple effects can shape everything from mortgage rates to stock valuations and government solvency.

In recent weeks, yields on long-dated US government bonds, or Treasuries, have jumped to their highest levels since the global financial crisis. Investors are demanding more interest to lend to governments awash with debt, at a time when sticky inflation deters central bankers from slashing interest rates.
 

Tom Stevenson, investment director at Fidelity International, said the US 30-year Treasury yield climbed above 5 per cent in May as markets recoiled at US President Donald Trump’s new tax cut proposals, known as the “Big, Beautiful Bill”.

That package alone could add more than $3 trillion to US debt, which already stands at a mountainous $36 trillion. It could lift the country’s debt-to-GDP ratio from about 100 per cent today to 125 per cent within a decade.

“The prospect of higher borrowing and unsustainable debt servicing costs led Moody’s to downgrade the US prized triple-A credit rating. Debt interest payments, already at $880 billion a year, will rise further as a result,” Mr Stevenson says.

He sees trouble ahead. “The US has lived beyond its means thanks to strong global demand for its debt. But confidence is beginning to wane, with investors seeking to diversify elsewhere.”

Vijay Valecha, chief investment officer at Century Financial in Dubai, says a similar story is unfolding elsewhere. In Japan, 30-year yields have climbed towards 3 per cent following the weakest demand in a decade. In the UK, 30-year gilt yields briefly touched 5.55 per cent as government borrowing soared.

Yet at the same time, stock markets have rallied after Mr Trump paused his “liberation day” trade tariffs on April 9, Mr Valecha says. “US markets enjoyed a V-shaped recovery with the S&P 500 up almost 20 per cent, while the tech-focused Nasdaq rose 27 per cent.”

The UK’s FTSE 100 and Japan’s Nikkei 225 are both trading above key technical levels, he adds.

But investors shouldn’t assume this will continue. “Global government debt is rising fast, pushing 95 per cent of GDP," he says. "If this continues, debt could reach 100 per cent of GDP by the end of the decade.”

Global inflation is also proving sticky, driving up interest rates and yields. That’s a warning shot for stock markets.

Mr Valecha flags up something called the “equity risk premium”, which measures the difference between what investors can expect from shares and the yield from lower-risk bonds. “As bond yields rise that gap gets smaller, it becomes harder to justify paying high prices for shares, especially when valuations are already stretched.”

The equity rally may continue but it will be bumpier, and careful stock picking is required, Mr Valecha says.

Source:

The National