In recent months, bond yields in major economies like the UK and the US have been on the rise, a shift that is causing concern in financial markets, especially as the cost of government borrowing climbs.
Higher bond yields signal that investors demand more return for lending money to governments, which means it’s becoming more expensive for governments to borrow. Additionally, higher bond yields mean that stocks are becoming less attractive. I mean, if you can receive an annual return of 5%-6% without taking any risk, would you not prefer that on any other option?
And so, for many, this raises the question: Are we on the verge of a financial crisis? A stock market crash? Or a market correction?
For now, the focus is on how governments will manage their debt and whether central banks will take action to keep the economy on track. Most central banks have rolled back their expectations for 2025 rate cuts; however, the trend for bonds continues.
In it all, understanding the bond market’s movements and their implications can help you prepare for potential shifts in the financial landscape.
What’s Behind the Global Rise in Bond Yields?
The rise in bond yields across the globe has sparked discussions about the future of the financial markets and the economy. Yields on longer-term bonds in major economies have been rising.=, and for investors, moving their investments to higher-yield income assets has been pretty easy.
But what exactly is driving this trend? What’s behind the global rise in bond yields?
1. Inflation Concerns
Inflation has been a significant concern for economies worldwide, particularly in the US and UK. As inflation rises, the purchasing power of money decreases. To combat this, central banks, like the Federal Reserve and the Bank of England, often raise interest rates to make borrowing more expensive and reduce spending, which in turn slows down inflation. Higher interest rates make government bonds more attractive to investors, pushing yields up.
2. Central Bank Policies
Central banks play a key role in influencing bond yields. When central banks raise interest rates, it leads to higher yields on government bonds. This is because higher interest rates make bonds issued earlier with lower yields less attractive compared to newer bonds offering higher yields. As a result, investors demand higher returns on government debt, driving up yields in the process.
3. Economic Uncertainty
The global economy has been facing uncertainty due to geopolitical tensions, market volatility, and concerns over economic slowdowns. This uncertainty often causes investors to seek safer assets, such as government bonds. However, the ongoing economic instability also prompts central banks to adjust their monetary policies, which can influence bond yields.
4. Debt Levels and Government Borrowing
As governments increase their borrowing to support public spending, especially during times of economic difficulty, the supply of government bonds rises. Higher supply combined with the need for investors to demand better returns for taking on that debt results in rising bond yields. Governments are borrowing more to fund deficits, and this greater supply of bonds can lead to higher yields.
5. Global Economic Outlook
Global factors, such as the performance of major economies and international trade, also play a role. For example, if investors believe that the economic outlook is not as strong as expected, they may adjust their expectations of future interest rate changes, leading to higher yields.
What Does Rising Bond Yields Mean for the Stock Market?
So, what’s the impact of rising bond yields across the globe on stock markets?
Rising bond yields often signal an inverse relationship with stock prices, as higher yields make bonds more attractive compared to stocks. When bond yields rise, borrowing costs for both companies and governments increase.
For companies, this means higher interest expenses on debt, which can reduce profitability and slow growth, leading to lower stock valuations.
For governments, higher borrowing costs can strain public finances and limit fiscal flexibility. As a result, investors may shift their focus from stocks to bonds, seeking the relative safety and higher returns offered by bonds during periods of rising yields.
This shift can cause stock prices to fall as capital moves out of equities and into fixed-income assets. In turn, the higher yields reflect investor concerns about inflation, economic slowdown, or financial stability, making bonds a more appealing option during times of uncertainty.
For now, we haven’t seen a correction in the stock markets so far, partly due to the hype following Donald Trump’s inauguration in January 2025. Having said that, an economic slowdown is certainly one of the economic scenarios to expect in 2025, and the key reason for that could be higher bond yields.
What is the Role of the UK and US in the Bond Market?
The bond markets in the US and the UK have seen significant shifts in recent months, with rising bond yields becoming a key concern. In the US, yields on government bonds have been increasing due to persistent inflation and the Federal Reserve’s decision to maintain higher interest rates.
The US economy has created more jobs than anticipated, which leads to expectations that the Federal Reserve may keep interest rates elevated longer than initially expected. According to Fed WatchTool, the Fed is likely to lower rates to 4%-4.25% in June, with a probability rate of 45%.
This increases borrowing costs, not just for the government but also for businesses and consumers. Also, the yield on a 10-year bond in the US has surged, signaling a shift in investor sentiment. According to experts, “Investors worry that this will lead to inflation being more persistent than previously thought.”
Also, in the UK, bond yields have also climbed to levels not seen since 2008, primarily driven by concerns about inflation and the economy’s underperformance. Inflation reached 2.6% in November, and the economy shrank for two consecutive months, leading to increased borrowing costs for the government.
Chancellor Rachel Reeves has stated, “All day-to-day spending should be funded from taxes, not from borrowing,” highlighting the impact of rising yields on government finances. Additionally, the pound’s depreciation against the dollar adds to the financial pressure, as it makes UK debt more expensive.
Is the Global Debt Crisis a Ticking Time Bomb?
Global debt levels are soaring, posing significant risks to economic stability. And, as bond yields climb, the cost of borrowing increases, putting nations and major economies under mounting pressure to meet debt obligations. This trend diverts resources from crucial public services like infrastructure and healthcare, creating a ripple effect across economies.
Emerging markets also face heightened challenges, with capital outflows driven by higher yields in developed nations leading to depreciating currencies and rising foreign debt repayment costs.
All in all, the global economy is about to face a challenging time in 2025 and the years ahead. However, the predictions are not so hard. Overall, the economy functions well, and higher yields can be good for the stock market to cool it off a bit. As long as yields remain around these levels, and the process of lowering rates can begin in mid-2025, then we can expect the global economy to continue in the same direction.
Is the S&P 500 P/E Ratio Signaling a Warning?
The S&P 500 P/E ratio, a key measure of market valuation, is also at elevated levels, raising concerns about potential overvaluation. This ratio reflects the price investors pay for each dollar of earnings, and historically, high readings have been precursors to market corrections. Current levels suggest optimism driven by expectations of low interest rates, which rising bond yields may challenge.

Such a scenario signals a potential disconnect between corporate earnings growth and stock prices. Investors should view the P/E ratio as a warning, carefully evaluating their portfolios amid signs of market overvaluation and rising economic uncertainty.
Summary – Is a Crisis Around the Corner?
In sum, rising bond yields demand a strategic investment approach. For investors, this environment calls for diversification, spreading investments across asset classes like equities, bonds, and commodities to manage risk effectively. In other words, if you have the capital, use it and get a fixed annual income. Remember, this has not been an option since mid-2000, before the 2008 financial crisis.
What about the markets? Well, it’s difficult to say now. A financial crisis is not highly expected right now; however, we can certainly expect a slowdown in economic growth and stock prices. A cool-down in major stock indices is a possible scenario for the upcoming year. Let’s not forget that the S&P500 has gained over 70% since 2022. As such, a correction in stock prices is very likely to occur in 2025.