The latest global bond sell-off has revived concerns over unsustainable public finances. Yet the recent weakness should be seen as a continuation of the long normalisation from the historic anomaly of the 2010s. That decade featured financial repression, with central banks buying trillions in government debt and benchmark rates near zero. Today’s yield levels would look perfectly normal to someone returning from a two-decade sabbatical.

At Deutsche Bank, the house view has consistently held that yields would rise due to heavy government issuance, the retreat of quantitative easing, and inflation persistently higher and more volatile than the pre-pandemic period. In the US, inflation has now been above the Federal Reserve’s 2 per cent target for more than five years. US nominal GDP growth hit 6.6 per cent in the second quarter, the highest since 2005 outside the Covid rebound, supported in part by the AI boom.

Fiscal concerns are real, but the equilibrium rate for bond yields is simply higher than markets grew accustomed to in the ultra-loose era. Returns for investors are stabilising. Over the past year, the Bloomberg US Treasury Total Return index delivered positive returns even as 10-year yields rose by about 0.60 percentage points. An investor who bought 10-year Treasuries at the October 2023 peak of 4.99 per cent would now have a total return of more than 16 per cent.