Investing.com — There is widespread debate about the sustainability of the recent rise in global bond yields, as well as their potential impact on financial markets and the economy.

Although short-term dynamics may support high yields, cyclical forces and structural factors indicate that yields will eventually stabilize, according to analysts at BCA Research.

The rise in bond yields, especially since the US Federal Reserve’s first rate cut in late 2024, reflects a combination of factors.

Changes in monetary policy expectations have been a major driver, with the market reassessing the path of future rate hikes.

This change has reverberated around the world, influencing yields in both developed and developing markets.

However, the high end of the yield curve has increasingly diverged from immediate policy expectations, highlighting the growing importance of term premia driven by inflation uncertainty and government funding concerns.

BCA Research says much of the recent rise in yields can be attributed to adjustments in risk premia.

Countries with current account deficits, such as the United States and the United States KINGDOM (TADAWUL :), experienced a more pronounced increase compared to surplus economies such as Germany and Japan.

This dynamic suggests that investors are factoring in greater fiscal vulnerabilities and the need for external financing, which could exacerbate volatility in bond markets.

Despite these headwinds, BCA Research maintains a cautiously optimistic outlook for government bonds in the medium term.

The brokerage flagged the self-limiting nature of higher yields, which would likely dampen growth and inflationary pressure.

High borrowing costs have already hit interest rate-sensitive sectors, such as housing and corporate finance, with signs of reduced activity in mortgage markets and increased refinancing challenges for corporate borrowers.

These developments are consistent with broader expectations of a slowdown in economic growth, which is likely to put downward pressure on yields over time.

In the region, BCA highlighted the value of some government bonds, especially those from economies with higher risk premia and weaker growth prospects.

The UK, for example, stands out as an attractive market despite recent yield spikes. Analysts argue that the selloff in UK gilts is fundamentally different from the 2022 mini-budget crisis and reflects broader global dynamics than domestic fiscal instability.

The high risk premium on UK bonds, combined with the cyclical vulnerability of its economy, provides a compelling risk-reward profile.

In the United States, rising inflation uncertainty remains a central theme. The Federal Reserve has signaled rising concerns about long-term price stability, which has contributed to rising term premia.

However, the BCA argues that these uncertainties are unlikely to persist indefinitely, especially if economic growth slows and inflationary pressures ease.

This backdrop strengthens the case for maintaining an above-benchmark portfolio duration, favoring high-quality government bonds over corporate debt.

The rise in global bond yields is also affecting the broader economy. Rising yields and the strengthening of the US dollar pose challenges for emerging markets whose debt is denominated in dollars.

In addition, tighter financial conditions could weigh on global trade and investment flows, increasing risks to growth.

BCA Research advises on a defensive positioning in fixed income portfolios, primarily managing duration and selective exposure to government bonds.

Despite the possibility of increased volatility in the near term, the brokerage emphasizes the long-term value of the bonds, especially as the economic cycle shifts to slower growth and lower inflation.