Asset Management: Monthly Macro Insights - October 2026

The rapid rise in long-term sovereign bond yields has become one of the most important developments in global financial markets. Can the global economy withstand higher long-term interest rates?

An endogenous shock...

While higher yields are often viewed as a threat to economic growth, the issue is more nuanced. If yields are being driven by rising risk premia, the consequences for growth could prove negative. However, if they are rising because growth prospects are improving, then higher rates may be both sustainable and economically justified.

There are reasons to believe that part of the recent increase in yields reflects stronger underlying growth dynamics. The global economy has proved remarkably resilient despite successive shocks, from trade tensions to conflicts in the Middle East. In fact, optimism surrounding AI and other technological innovations has led some investors to revise upward their assessment of future productivity growth, particularly in the US, and higher equilibrium interest rates would thus be a natural consequence.

... or exogenous?

However, the evidence suggests that stronger growth is only part of the story and several indicators point to less benign explanations for the rise in yields, particularly inflation. A second indication comes from fiscal developments. Public debt ratios have increased substantially across most advanced economies, while deficits remain unusually large despite relatively healthy economic conditions. While the AI boom is adding further upward pressure as massive financing requirements boost demand for long-term capital, the growing supply of bonds requires investors to absorb more duration risk, contributing to higher yields. Financial market behaviour, especially in the credit market, further suggests that the rise in yields cannot be explained entirely by optimism about growth.

At present, the evidence remains mixed but points more towards a rise in interest rates driven by inflation persistence, fiscal imbalances, elevated bond supply and higher risk premia than by a significant improvement in long-term growth prospects. If yields continue to rise, the resulting tightening of financial conditions could eventually weigh significantly on global growth, even if the adjustment process proves slower than in previous cycles.