The global bond sell-off is not a "fiscal doomsday"! Deutsche Bank: It's just the end of a decade-long era of "financial repression".

Global bond yields continue to climb, raising concerns about fiscal risks and a debt crisis. However, Deutsche Bank believes that this round of bond selling is less a harbinger of "fiscal doom" and more a continuation of the normalization of the past decade's extremely loose monetary policy and low interest rates.

Jim Reid, global head of macro research at Deutsche Bank, recently wrote that the current weakness in the bond market stems from the collapse of the "financial repression" of the 2010s—when central banks purchased trillions of dollars in government bonds, benchmark interest rates hovered near zero for a long period, and sovereign financing costs were artificially suppressed for many years. He stated that, viewed from a century-long historical perspective, current yield levels are merely a return to normalcy and are still significantly far from the threshold of a true crisis.

For investors, this shift is bringing substantial improvements: bonds are regaining their ability to provide returns, rather than relying primarily on capital gains. As initial yields rise, the market's buffer expands, and investors are in a significantly different position to face the next round of negative shocks compared to the early 2020s.

The end of financial repression, not the beginning of a crisis.

In his article, Jim Reid clearly distinguishes between two narratives: fiscal collapse and normalization. He acknowledges that long-term fiscal risks do exist, but emphasizes that the core forces currently driving yields upward are structural, including large-scale net issuance of government bonds, the exit from quantitative easing, and inflation remaining above pre-pandemic levels.

In the United States, inflation has remained above the Federal Reserve's 2% target for more than five consecutive years. Meanwhile, nominal GDP grew by 6.6% year-on-year in the second quarter, the highest level since 2005 (excluding the COVID-19 pandemic resurgence). This growth was driven to some extent by rising energy prices and inflation, but real economic growth also remained resilient, partly thanks to the continued expansion of the artificial intelligence wave.

Jim Reid points out that Deutsche Bank has consistently predicted rising yields for years, and current market movements are highly consistent with this framework. He believes that the equilibrium level of bond yields has risen significantly since the era of ultra-loose monetary policy, representing a systemic shift rather than a short-term anomaly.

Behind the rising yields, total returns have quietly turned positive.

Despite the price pressure from rising yields, Jim Reid highlighted an often overlooked fact: from a total return perspective, bond investors are in an improving position.

Taking US Treasury bonds as an example, the Bloomberg US Treasury Total Return Index recorded positive returns over the past year, despite the 10-year yield rising by about 60 basis points during the same period. Based on current levels, the 10-year Treasury yield would need to rise to approximately 5.5% in the next year, or to approximately 6.4% within two years, for the total return to turn negative. He further pointed out that investors who bought 10-year US Treasury bonds at their peak yield of 4.99% in October 2023 have already achieved a total return of over 16%.

The UK government bond market also confirms this logic. The current 10-year UK government bond yield is about 65 basis points higher than the peak during the 2022 "mini-budget" crisis, but the broad UK government bond index has still returned about 12% since the peak of that crisis, without experiencing a sustained period of negative returns over the four years.

The normalization process is not yet complete, but bonds have returned to their essential nature as bonds.

Jim Reid acknowledged that the long-term upward pressure on yields has not dissipated. Without significant downward revisions to economic expectations or external shocks, the forces driving yields higher will not easily recede. He cited data from the past century, pointing out that the average inflation rate in the US was 3%, and in the UK it was 4%, both higher than levels since 1990, but still lower than current long-term yields—meaning that, from a historical perspective, current yield levels are not abnormal.

His core conclusion is that bonds are returning to their traditional function. After a period of abnormality lasting several years and almost entirely reliant on capital gains, more normal yield levels are once again providing investors with interest income that can grow over time through compounding, thus helping to smooth out volatility and stabilize returns.

“It’s hard to expect great returns, especially real returns, but at least bonds are like bonds again,” Jim Reid wrote. “Investors should keep that in mind when the next round of inevitable negative headlines comes.”

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