For the past several years, government bond investors have had a relatively simple story to follow: yields have gone up, more or less everywhere, more or less together. First it was inflation forcing central banks to react in 2022. Then it became something more structural — a readjustment to the reality that developed-world governments are carrying more debt than markets are comfortable financing cheaply.
Previously we had a situation where governments were the risk-free asset. That has shifted. These developed economies aren’t at risk of default, but there is a premium now being priced in for how future financing gets managed. More debt has to be issued to cover both new spending and the cost of servicing what's already outstanding − and that, to my mind, is the common thread running under bond markets everywhere from Washington to Tokyo.
But that shared starting point is where the similarities end. Beneath the synchronised rise in yields, we see markets pulling apart into distinct, idiosyncratic stories. For investors, understanding why each market is moving now matters more than tracking the direction they're moving in.
Four different problems wearing the same disguise
The US: exceptionalism meets an inflation shock. America's fiscal position is, on paper, no better than anyone else's. Tax cuts, higher defence spending and rising commitments elsewhere all have to be paid for. But a resilient economy has let Washington carry that debt load without markets treating it as an emergency. What's changed more recently is a fresh inflation impulse: the oil-price shock stemming from the Iran conflict has revived talk of further Federal Reserve rate hikes that nobody was pricing in at the start of the year. The result has been a bear-flattening of the US curve − short-end yields rising sharply on hike expectations, the long end comparatively anchored because inflation expectations further out haven't moved much. This is a central bank dealing with inflation while the economy is still robust.
The UK: fiscal strain without the growth to offset it. If the US can lean on the size and resilience of its economy, the UK has no such cushion. Low growth, a heavy debt load, and a policy response that hasn't reassured markets have combined to push gilt yields, and the cost of borrowing, higher. There's a budget on the horizon that we see as a potential risk event: tax rises without credible spending discipline would not be well received.
Europe: growth is fine − it's politics doing the damage. The European picture splits sharply by country, and Germany and France make the contrast plain. German data has been improving, which alone would justify higher yields − a "good news, higher rates" story much closer to the American pattern. What's complicating it is domestic politics: recent regional elections have seen the governing CDU lose ground to parties on the left and the right, as the political centre erodes.
France provides a sharper illustration. OAT-Bund spreads have widened to their most extreme levels on record − wider even than Italy's − and we attribute this to political paralysis rather than economic fundamentals. With Macron unable to stand again, Le Pen ahead in polling, a resurgent left, and no working majority in the National Assembly, the immediate flashpoint is whether a budget can be passed at all. Spain and Greece, by contrast, have both benefited from improving domestic stories, and Italy now looks more stable under its current government than France − a reminder that "European bonds" is no longer a useful single category.
Japan: still, above all, a currency story. Japan's economy isn't robust in the way America's is, but it is solid enough to sustain some further hikes. These are unlikely to go as far as those anticipated in the US. In our view, the Bank of Japan's tightening is still primarily a defence of a weak yen, as well as a gradual normalisation of the yield curve. Inflation is as much of a problem here as it is elsewhere, although perhaps not as extreme. We don't think the central bank will deliver an aggressive hiking programme, but we may well see one more hike.
What this means for the curve
Across all four markets, the short end is telling a broadly similar story: rate-hike expectations have already been priced in aggressively, arguably too aggressively, making short-dated bonds reasonably attractive relative to cash almost everywhere.
It's the long end where the real differentiation − and the real investment decisions − now sit, and the reasons diverge by country. Fiscal and bond-supply concerns in the US; political risk in France and, to a lesser extent, Germany; fiscal and monetary strain together in the UK; currency defence in Japan. That distinction matters for positioning, because a sell-off driven by a French budget vote is a fundamentally different risk to one driven by US fiscal supply or Japanese currency policy.
How we're positioned
In the US, we are not extending duration from here. Portfolio duration has been held around four-and-a-half years. With inflation likely to remain sticky and the risk of at least one further Fed hike this year, we see limited justification for going long duration in Treasuries today. Instead, we've expressed exposure through credit, selling investment grade to fund higher-quality high yield, where spreads are tight but absolute yields and coupon income remain attractive. We are treating rate- and oil-sensitive sectors, such as consumer discretionary and travel, cautiously, on the view that any slowdown transmits there first as higher borrowing costs feed through to consumers and businesses.
In Europe, our exposure is deliberately light. We hold some Bunds but aren't adding at current levels (around 3.50% on the 10-year, with a lot already priced in), and have no meaningful exposure to France, the UK, or European peripherals. Taken together, I'd describe the book as broadly neutral versus peers on duration − not extending, but not cutting either, with the near-term risk being a Trump-brokered ceasefire ahead of the US midterms that could spark a broad rates rally.
The overarching message is straightforward: this is no longer a market where one call on duration or the curve travels across borders. Country by country, the drivers differ, and so do the opportunities and the risks − which is exactly where fixed income investors now need to be focusing their attention.
In brief
The global interest-rate cycle is fragmenting. Higher debt is a common backdrop, but the forces driving bond markets are increasingly country-specific.
The long end is where the divergence matters most. Longer-dated yields are increasingly reflecting different fiscal, political and monetary risks.
A single global duration call is becoming less useful. Investors need to assess bond markets individually and understand why yields are moving.
This creates a more selective fixed-income opportunity set. The focus is increasingly on building conviction market by market rather than applying one rates view globally.
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