Government bond yields rose again in August as stronger economic growth, persistent inflation and heavy debt issuance kept pressure on fixed-income markets. At the same time, equity investors began to look beyond semiconductor stocks towards software companies that may be better placed to monetise artificial intelligence.
The rise in yields reflects a simple problem for bond markets. Economic growth has remained stronger than expected, supported by consumer spending, fiscal stimulus and continued investment in artificial intelligence. That resilience reduces the case for rapid interest-rate cuts.
Higher energy prices are also adding to inflation risk. Equity markets have so far absorbed the increase, but bond markets remain more sensitive because sustained energy inflation could keep central banks cautious.
The US inflation backdrop remains particularly important. Inflation has stayed above the Federal Reserve’s 2% target since March 2021, which supports the case for interest rates remaining higher for longer.
Debt supply is adding further pressure. Artificial intelligence investment is running at around $1 trillion this year, with a growing share financed through debt markets. More issuance increases the amount of capital required from bond buyers and can push yields higher.
Government borrowing is another factor. High public debt across developed markets, combined with limited political appetite for major spending cuts, is contributing to a higher fiscal risk premium. This is not the main driver of the recent move in yields, but it remains a structural concern.
US efforts to influence longer-dated yields have so far had limited impact. Treasury Secretary Scott Bessent’s decision to support purchases of 30-year bonds using proceeds from shorter-dated issuance briefly affected the market, but did not change the broader forces driving yields.
Arbuthnot Latham remains underweight government and corporate bonds in client portfolios. The position reflects the view that yields may struggle to fall while economic growth remains resilient. A clear deterioration in growth would make the asset class more attractive.
Arbuthnot Banking Group PLC (LON:ARBB), operating as Arbuthnot Latham, offers private and commercial banking products and services in the United Kingdom. Established in 1833, Arbuthnot Banking is headquartered in London, United Kingdom.
