Key takeaways
- Global government bond yields have moved sharply higher as several pressures converge
- AI investment, energy prices and uncertainty around Federal Reserve policy are contributing to the move
- Hawkish signals from Canada and Japan highlight growing differences in global monetary policy
There’s more behind the rise in bond yields
On Friday, the August U.S. employment report surprised to the upside, with 162,000 jobs added during the month. Year to date, the labor market has shown impressive resilience, with hiring also becoming more balanced across sectors than in previous years.
Equity markets were relatively flat last week, although that headline masked some notable volatility beneath the surface. U.S. stocks fell earlier in the week before rebounding sharply on Thursday, helped in part by renewed strength in technology shares.
See more: Rising Yields May Create Opportunity Rather Than Signal a Bond Market Crisis
For our Global Chief Investment Strategist Paul Eitelman and our Canadian investment strategist BeiChen Lin, however, the more significant story has been unfolding in fixed income markets.
Government bond yields across several developed markets have climbed to multi-decade highs. In the U.S., the 10-year Treasury yield has risen roughly 30 basis points during the third quarter alone.
As Eitelman explains, there is more behind that move than changing expectations for Federal Reserve policy.
One factor is the scale of the AI investment cycle. Companies are increasingly turning to capital markets to finance significant infrastructure spending and at the same time governments across many developed economies are funding sizeable budget deficits. Together, those financing needs are increasing the amount of debt investors are being asked to absorb, putting upward pressure on yields.
Energy prices are another factor. West Texas Intermediate crude is trading above $90 per barrel, roughly 30% higher than its June lows. Higher energy prices could feed through into inflation and are adding another layer of uncertainty for bond investors.
Fed uncertainty adds to rate volatility
The path of Federal Reserve policy remains another important source of volatility.
Markets have received mixed signals from policymakers in recent weeks. Fed Chair Kevin Warsh struck a hawkish tone at Jackson Hole, suggesting the central bank may still have work to do on interest rates.
Comments from other Fed officials this week have been more balanced. Governor Christopher Waller, for example, appeared to favor holding rates steady at the September meeting, helping stabilize Treasury yields on Thursday.
The result is that investors are still weighing whether the Fed’s next move will be another hike or an extended pause.
For Eitelman, that uncertainty is part of a broader global story. Rising yields are not confined to the U.S., suggesting markets are responding to a combination of inflation, supply and policy risks rather than any single Federal Reserve signal.
Canada balances inflation against weaker growth
The Bank of Canada added another hawkish voice to the policy debate this week.
The Bank held its policy rate unchanged at 2.25%, as expected, but Governor Tiff Macklem emphasized concerns about headline inflation, which is running around 3%. Canadian government bond yields rose by roughly 10 basis points across both shorter and longer maturities following the decision.
BeiChen Lin sees a more balanced picture beneath the headline inflation number.
Core inflation remains relatively close to the Bank of Canada’s 2% target, while headline inflation is still near the upper end of its 1% to 3% target range. At the same time, Canada continues to face meaningful growth headwinds, with elevated unemployment and economic activity running below potential.
Ongoing uncertainty around USMCA negotiations is also weighing on business confidence, investment and hiring.
Taken together, Lin believes these two-sided risks continue to support the case for Canadian government bonds, despite the Bank of Canada’s more hawkish rhetoric.
Japan moves closer to another rate hike
Japan is also seeing a shift in policy expectations.
Recent comments from Bank of Japan officials have raised the possibility of larger rate increases as policymakers respond to stronger inflation pressures. Markets are currently expecting at least a 25-basis-point hike, although the Bank of Japan’s next decision will not come until later this month.
The comments have also provided some support for the yen. After weakening despite previous currency intervention, the yen strengthened toward 155 against the U.S. dollar following the latest hawkish signals.
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