The Fed has cut rates by 175-bps since September 2024 but, in that time, the 10-year treasury yield has risen by around 50-bps. That’s pretty much unheard of; rate cuts normally spur lower yields, not higher yields. And it is not just the US. The Bank of England has cut by 125-bps (probably 150-bps after), but 10-year gilt yields are also around 50-bps higher than when the Bank started.

What’s going on? Economic growth has been weak, inflation has come down, so there seems little reason here to think that yields should rise. Steven Barrow, Head of Standard Bank G10 Strategy said, the key is government debt and, when you think about it, rising yields in spite of policy easing is almost a natural progression, rather than being unnatural. For what we’ve seen over the last 20 years is a series of crises that have required governments to essentially bail out the private sector.

First, there was the global financial crisis, then Covid-19 and, more recently for Europe, the war in Ukraine. All have led to massive fiscal transfers to the private sector and, as a result, government debt has exploded higher while debt in the private sector has been far more stable.

For instance, global government debt has risen from around 55% of GDP at the start of the century to near 100%. But over this period increases in household, corporate and financial company debt have increased by far less. It means that when we look out over the array of debt markets, it is government debt that is the most worrisome, not private sector debt.

What’s more, it is also government debt in the major G10 countries that is particularly problematic, not the majority of emerging market countries. This may help explain why the SARB has been able to cut policy rates over the past 15 months with no cost in terms of higher long-term yields.

In fact, yields have fallen substantially over this period by close to 200 bps for 10-year SAGBs. The fact that major central banks in the G10 have ended their quantitative easing and, in some cases, started selling bonds, may have only served to amplify the pressure on government bonds.

As we roll into 2026, so some G10 central banks will likely stop their easing cycle. Some may even start to lift rates. In other words, if easier monetary policy was any sort of support at all for longer-term government bonds in 2024 and 2025, it is going to be much weaker, if not disappear, in 2026.

Does this mean that yields will rise even more? Much here will presumably depend on the path for budget deficit consolidation and economic growth. If growth improves and the government takes tough action to reduce budget deficits, it is just possible that yields could fall again on renewed debt optimism, even if policy easing comes to an end. But this seems unlikely. The US, of course, is key in this regard, as the movement in its yields sets the tone for many other markets. But here there’s next-to-no chance of any meaningful budget consolidation.

Instead, the US Administration plans to grow its way out of the debt. It is a tactic widely used by the Republicans in the past, and it always seems to fail. AI might appear to many to be the technological breakthrough that will change this, but it was notable that FOMC members did not lift their estimate for potential US growth in last week’s forecasts despite all the AI hype.

In short, Steven Barrow thinks that debt and deficit concerns will keep longer-term yields elevated, and not just in the US. If that’s right, it means that investors should favor equities over government bonds, favour private debt instruments over public debt instruments, and, if holding government debt, should favour emerging market bonds over developed-country debt instruments.