Bond yields rise as markets adjust to higher interest rate expectations

Bond yields have risen significantly since mid-September 2024, with ten-year gilt yields increasing to 4.8% and ten-year Treasury yields reaching 4.7%. This rise is linked to expectations of higher interest rates from central banks over the next several years. The increase in yields is primarily due to higher real yields rather than inflation expectations. In the UK, the demand from pension schemes for inflation-linked bonds has kept yields lower historically, but recent trends show a shift towards higher term premia. Overall, the bond market is adjusting to anticipated changes in central bank policies, with both UK and US markets reflecting a similar pattern of rising yields. The dynamics of these changes are complex, influenced by various market factors and investor behavior.