Key takeaways

  • Bond volatility has become the main feature of recent market moves. Equities have remained relatively resilient, but bond yields have moved higher in a context in which markets are becoming more sensitive to macro data and policy expectations. As yields move higher and news flows evolve, markets are readjusting across countries and curves. Global bond markets have been the first to readjust, but we have recently seen moves in global credit markets too.

  • The moves are being driven by several overlapping forces. Tensions in the Middle East have kept oil prices elevated and added to inflation pressure, while stronger US activity data in recent weeks and heavy corporate issuance linked to the AI build-out have pushed long-term yields higher. While benefiting from solid fundamentals, European bonds are under pressure from risks related to energy prices and inflation, reinforced by some fiscal and political concerns, including in France.

  • For investors, the key implication is the need for a more active approach in fixed income and stronger diversification. Higher yields are improving the appeal of bonds, which now offer yields not seen in decades, but as flows adjust across countries and segments, we see volatility remaining high and dispersion rising in the credit space. In this environment, an active and globally diversified approach to fixed income remains important, with a preference for higher-quality bonds. At the same time, while equities are well supported by strong earnings, prospects for higher inflation and higher yields will increase scrutiny on balance sheets, and on excess capital and debt build-out in the AI ecosystem. This will call for more selection and increase diversification at sector level and across asset classes.

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Markets weigh rising yields and AI exuberance

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