The latest news from the bond markets is far from reassuring. Across the world, interest rates are rising sharply, putting downward pressure on bond prices. Several factors point to this trend continuing. The question therefore arises: can the world avoid a full-scale bond market crisis?
Good Reasons Are Driving Interest Rates Higher
The rise in interest rates is affecting all major G7 economies and is driven by broadly similar mechanisms. At shorter maturities, inflation is the main factor. Fuelled in particular by soaring energy prices, inflation remains above central banks’ targets. Central banks are therefore raising their policy rates, pushing short-term yields higher as markets try to anticipate how far monetary tightening will go. At longer maturities, other factors come into play. Investing in a long-term bond means locking up capital for several years. As a result, the ability of central banks to bring inflation sustainably under control is crucial, particularly in the United States, where inflation has remained above target for more than five years. Public finances also matter: the more they deteriorate, the greater the risk perceived by investors. Large budget deficits, expected to persist for many years, are therefore being closely monitored. To compensate for these risks, investors are demanding higher yields. They also face an unprecedented choice, with debt issuance increasing across the board. This applies to governments, but also to major technology companies that need to finance massive investments in infrastructure linked to artificial intelligence.
Interest Rates Are Surging
The rise in interest rates therefore appears justified and is continuing unabated. New records are being reached week after week. In the United States, the 30-year Treasury yield has exceeded 5.6%, its highest level since 2002. The 10-year yield is around 5.3%, an unprecedented high since 2007. Meanwhile, the 2-year yield, close to 4.9%, now reflects market expectations of at least three further policy-rate increases. The situation is similar in Europe. Amid ongoing budget discussions and with no credible solution on the horizon, the yield on France’s 10-year government bond has reached 4.8%, its highest level since the 2008 financial crisis. The spread over the German Bund with the same maturity is now around 120 basis points. Yet, with a yield close to 3.6%, the Bund itself is trading at its highest levels since 2009. The United Kingdom is also not immune. Between persistent inflation and fiscal constraints, the 10-year yield is approaching 5.4%, an unprecedented level since 1999. In Japan, long regarded as a symbol of near-zero interest rates, the 10-year yield has now exceeded 3.1%. This is a worrying development for a country whose public debt was close to 249% of GDP in 2025 and whose deficits remain substantial. Naturally, this surge in borrowing costs is raising numerous concerns. For governments first, as rapidly increasing interest expenses are forcing difficult trade-offs. For the economy, higher borrowing costs can curb both investment and consumption. Finally, investors are increasingly questioning the ability of some borrowers to meet their obligations. Some are even discussing the possibility of a bond market collapse, with potentially major consequences.
Reversing the Trend Will Not Be Easy
The question is therefore whether a major bond market crisis can be avoided. Several scenarios are possible, with very different degrees of probability. The most desirable outcome would obviously be an end to the conflicts in the Middle East and Ukraine. A return to normal conditions in energy markets would quickly bring down hydrocarbon prices, reduce inflationary pressures and help ease bond yields. A second possibility would be a return to more disciplined fiscal policies. At this stage, however, given the quality of fiscal governance in several G7 countries, this scenario appears unlikely. That leaves a third option — the last resort: a large-scale return to quantitative easing programmes. As during the 2008–2009 financial crisis or the pandemic, central banks would create money to purchase debt on the secondary market. This additional demand would mechanically reduce the yields at which governments finance themselves. This would be an attractive prospect for Washington, Paris, London and Tokyo. However, such a strategy would come at a cost: it would put the credibility of central banks at stake. To be acceptable, it would need to be accompanied by concrete measures and a credible programme for restoring fiscal balance. It is no coincidence that, during the European sovereign debt crisis, Germany insisted on the involvement of the IMF, an institution with expertise in fiscal consolidation programmes. A similar scenario could well re-emerge in the months or quarters ahead.
Our View
Can a bond market catastrophe be avoided? In our view, the answer is clearly yes. The ideal scenario would obviously be an end to the ongoing conflicts in the Middle East and Ukraine, an outcome that would significantly benefit the global economy. However, it is difficult to believe that this will happen today, just as it is difficult to expect a spontaneous return to genuinely responsible fiscal policies. In this context, central bank intervention increasingly appears to be the most likely option. It would be a last-resort solution, potentially accompanied by painful measures, but one that could become necessary if tensions in the bond markets were to intensify further. Such a development would also create investment opportunities, as such high interest-rate levels could then give way to a rapid decline in yields. We are not there yet, however. We therefore do not believe in a scenario of a widespread collapse of the bond market dragging financial markets down with it. Aware of the risks, we maintain diversification across our portfolios, including exposure to Norwegian bonds across all our strategies. This is clearly not the time for panic.