Global bond markets: volatility, opportunity and the case for duration
31 JUL, 2025
By Chris Iggo
It’s important to understand the strong correlation between government bond yields across G7 markets. Since 2022, yields have risen across the board. Given the liquidity of government bond markets, their role as risk-free assets, and capital mobility, it is understandable that yields are so closely linked.
In the case of the UK gilt market, a more detailed analysis suggests that idiosyncratic factors play a greater role in yield movements, as seen in Chancellor Rachel Reeves’ unease in the House of Commons. However, the most significant issue is the UK’s troubling fiscal outlook, with the current government unable to advance welfare reforms and at risk of breaching its own fiscal rules. September 2022 showed us that bond vigilantes don’t favour risky bets on tax and spending to boost growth. A more considered, credible fiscal and growth strategy is needed—yet still elusive.
Additionally, the UK inflation profile remains disappointing. Consumer price inflation rose to 3.6% in June, up from 3.4% in May. It's worth remembering that, before the latest budgetary effects kicked in, the annual rate was 2.6% in March. While some argue that inflation will fall sharply once budget-related pressures fade by 2026, the future of UK tax policy is uncertain. This raises the risk that inflation expectations remain elevated. A much slower economy may be needed to tame UK inflation, which bodes poorly for fiscal prospects.
As a result, UK gilt yields are likely to remain more volatile than those in other bond markets. Over the past five years, 10-year yield fluctuations have been highest in the UK and Italy, and lowest in Japan, despite ongoing market anxiety. In Japan, concerns include rising inflation, a shrinking central bank balance sheet, and structural shifts in long-term domestic bond demand, all contributing to higher yields. This could influence global capital flows, as Japanese investors are incentivised to favour domestic assets over foreign exposure.
One takeaway is that, given current UK yield levels, a bullish duration position in gilts could be attractive. Interestingly, some parts of the UK gilt market have outperformed eurozone government bonds this year: the 7-to-10-year segment has delivered a total return of 3.6% in the UK, compared with 1.4% for a comparable eurozone index.
Then there are the specific concerns around US Treasuries. Midweek rumours suggested that President Donald Trumpwas poised to fire Federal Reserve Chair Jerome Powell. It’s no secret Trump wants rate cuts. The worst-case scenario would be Powell replaced by someone more compliant—undermining FOMC processes and shaking confidence in the Fed’s independence.
Such a scenario would likely lead to higher Treasury yields, a steeper yield curve, and a weaker US dollar. Breakeven inflation rates would also rise, given the inflationary implications. Risk premiums on US rates would increase amid monetary policy uncertainty, with knock-on effects for global yields and currency markets. While it’s unlikely Trump would take such an extreme path, if he did, the impact on risk assets would be negative. Imagine higher inflation driven by tariffs, and real rates near or below zero—this makes inflation protection more essential than ever. Breakeven inflation rates continue to climb in US markets.
Risks and opportunities abound: there’s legitimate concern about inflation, especially in the US and UK, and about fiscal outlooks globally. Yet, at the same time, eurozone inflation is back on target, with a stronger euro helping to contain it. China faces no inflation and is once again exporting deflation, ramping up exports to Asia and Europe to compensate for lost market share in a tariff-shielded US. These divergent inflation trends will create divergent return opportunities across global fixed income markets.
It’s never been more exciting to be in the bond market.
