Video summary

Why Global Bond Yields Are Rising ? | The valuation school

Main summary

Key takeaways

Finance

Finance-focused summary: why global bond yields are rising

Core market mechanics (bonds)

  • Bond yield up ⇒ bond price down, and yield down ⇒ price up.
  • Long-term yields (e.g., 10Y) reflect:
    • The expected path of short-term rates over the holding period
    • A term premium: extra compensation for locking money for longer (and for uncertainty)

Key US rate levels and timing mentioned

  • US 10-year Treasury yield
    • Reached the highest level since 2008
    • First time since 2008 it crossed 5%
  • US 30-year yield
    • Crossed 5% “a few days” after the 10Y move
  • Period referenced
    • After 2020, rates in major economies trended upward, especially in the recent past

“Valuation school” framework (term structure + catalysts)

Step 1: Term premium and the gap

  • Short-term yields track the Fed funds rate (described as repo-like policy rate).
  • The spread between short- and long-term yields is attributed to term premium.

Step 2: Policy expectations (hawkish pivot risk)

  • Reference to Jackson Hole remarks around Aug 27.
  • CME FedWatch probabilities (as stated by the speaker):
    • Before Aug 27: 65% chance rates stay; 35% change
    • After speech (Aug 28): probabilities reversed (speaker’s numbers: 57% “fixed,” 43% remain current—wording unclear, but hawkish repricing is implied)
    • As of Sep 16: 92% probability rates increase; 7.5% probability unchanged

Step 3: Risk aversion + fiscal deficit ⇒ higher required returns

  • Higher risk ⇒ higher required yield.
  • Mechanism emphasized:
    • Higher fiscal deficits ⇒ government must issue more bonds
    • That raises term premium / the yields required
  • Numbers cited:
    • US deficit gap around $1.8T for 2024/25
    • Estimated ~$2.4T per year over the next 10 years (speaker’s wording)

Step 4: “Crowding out” (more borrowers competing for capital)

  • AI investment described as adding to demand for capital alongside government borrowing.
  • With limited savings, more demand for funds pushes rates up.

Step 5: Buyer mix changes (pension/central bank demand shrinking)

  • Defined benefit vs defined contribution
    • Historically, defined benefit funds parked in government bonds
    • Shift toward defined contribution (e.g., 401(k)) reduces bond demand
  • Central bank reductions
    • Claim that the Fed has been reducing holdings of US Treasuries since 2021–22
  • Result: fewer marginal buyers ⇒ investors demand more yield.

“High inflation” channel (real return argument)

  • Inflation raises the nominal yield needed to preserve purchasing power.
  • Illustrative logic given:
    • When inflation was ~2%, a ~4% bond implied ~2% real return
    • With inflation around ~4%, investors demand roughly ~6.5% (speaker’s illustrative target)

Global transmission: why developed markets move together

Benchmark role of US Treasuries

  • US yields act as a global benchmark.
  • Logic: if US yields rise vs peers, capital reallocates to the higher-yield market, forcing other countries’ yields higher.

Developed-market “structural” pressures mentioned

  • Higher/debt-heavy governments with limited growth options
  • Macro uncertainty and cost pressures, including oil > $100 (linked to a referenced US–Iran war)
  • Debt/growth risks and inflation uncertainty leading to higher required yields globally

Specific yield/macro numbers/tickers mentioned (sovereigns)

Illustrative yield changes described:

  • UK: ~0.97% → ~5.3%
  • Germany: cited around negative ~3.34% (context: rising back toward higher levels)

  • Japan: ~0.07% → ~2.91% Debt levels cited:

  • Japan debt: ~248% of GDP

  • UK debt: ~93–100% of GDP
  • Claim: developed markets “together” were at multi-year highs

Developing vs developed: why emerging yields didn’t spike as much

Claimed observations

  • Emerging-market bond yields (especially India’s 10Y) were said to not rise materially during the move.
  • The only notable exception mentioned: Brazil (~10–14% yield cited).

Mechanisms proposed

  • Emerging economies have more growth tailwinds versus the developed-market “debt without growth” concern.
  • Inflation and domestic investor behavior differ:
    • Claim: emerging pension funds still allocate around ~50% to bills/bonds
    • Equity allocation for emerging pension funds described as single digit (<10%)
  • Conclusion: stronger domestic demand cushions sell-offs.

US government “refinancing risk” and fiscal/interest expense stress

Refinancing vs new issuance

  • US issuance breakdown cited:
    • ~$11T debt raised in 2025
    • ~$2T new, ~$9T refinancing
  • Concern: refinancing at higher rates increases interest costs.

Rates on existing vs new debt

  • Average interest rate on existing US debt cited: ~3.4%
  • When refinancing 10Y/30Y, implied new cost: ~5% to 5.25%
  • Interest expense described as among the largest budget expenses after Social Security.

Economic spillover described

  • Higher government yields ⇒ higher corporate borrowing costs ⇒ investment slows down.

Policy reaction described (short-term borrowing + intervention risk)

Borrowing strategy shift

  • Claim: government prefers short-term borrowing because short rates are lower:
    • Short-term borrowing ~4% vs ~5.35% cited
  • Short-term share of borrowing cited: ~13% historically to ~~22% now
  • Risk: rollover risk (must refinance frequently; higher rates can bite quickly if the Fed tightens again)

Market intervention discussion

  • Idea: direct central-bank buying could suppress yields, but intervention risks controversy and instability.
  • Speaker warns intervention could create instability through forced demand and policy credibility concerns.

“Global bond loop” (feedback cycle) risk framing

  • Higher rates increase interest costs and fiscal deficits
  • Larger deficits require more borrowing and bond issuance
  • More issuance requires higher yields to attract buyers
  • Together, these dynamics create a loop that sustains higher yields

Disclosures / disclaimers

  • No explicit “not financial advice” disclaimer is present in the provided subtitles.

Instruments / tickers / assets mentioned

  • US Treasuries: 10-year Treasury, 30-year bond
  • Fed funds rate (policy rate)
  • Government bonds / sovereign bonds (global developed and emerging)
  • Pension fund assets
  • Mutual funds, equities (mentioned as alternatives)
  • 401(k) (defined contribution example)
  • Norway sovereign wealth fund (Norway described as having the largest sovereign fund)
  • US Treasury sales amount: $80B (speaker claim)
  • Oil: crossed $100

Countries / sovereigns referenced

  • Developed: US, UK, Germany, Japan
  • Emerging/developing: India, Brazil, Vietnam, Thailand, China, Philippines, Mexico

Key presenters / sources mentioned

  • Parth Verma (speaker; “Signing off”)
  • Kevin Warsh / Fed chairman reference tied to Jackson Hole
    • Name appears in subtitles as “Kevin Wash/Warsh” (likely intended to refer to a Fed chair; exact person unclear from transcription)
  • CME FedWatch
  • Fed / central bank of the US (referred to as “RBI of America” by analogy)
  • Donald Trump
  • Rishi Sunak and Liz Truss (UK political reference)
  • Norway sovereign wealth fund (source referenced)

Original video