Drivers of the Yield Curve

Much has been made of the sudden increase in government bond yields the world over. It would behoove us to analyze the drivers of this increase, so that we can anticipate changes and thus the financial markets.

The Three causes of the Bond Bear Market

1. Savings now have more options
   Fixed income investors had very few until recently. They could go into safe US and OECD government bonds, or very high quality corporate bonds. With the excitement and fear of AI, there is now a new kid on the block.Investors now have the ability to lend hyperscalers all the cash they would need to create datacenters for what everyone, at least for now, thinks is the best thing since sliced bread. In order to keep these lenders inticed, government bon yields have to rise to compete with the competitive yields being offered by the datacenter builders

2. War-induced Inflation
   This needs no explanation. As oil prices go up, and flow through the economy leading to higher prices overall, the Fed just has to shrug and raise rates. Raising short term rates affects the entire term-structure.

3. Fiscal Conditions
   It also doesn't help, if governments spend like drunken sailors. This disease of spending now to get elected and letting your descendants do the worrying of paying back the loans, is prevalent across the developed world, and is not going away anytime soon.

What might change: short-medium term

1. Cessation of war, at this point, any war, would have a knee jerk reaction across the markets with the yields collapsing in anticipation of lower inflation and the Fed (and other central banks) pausing and then lowering rates.
2. Popping of the AI bubble, or at least slowing down of debt issuance across the hyperscalers would also help shore up demand for US govt bonds.