Global bond yields have recently risen sharply to become more in line with fair value. Previous episodes have demonstrated that what starts as a benign correction could evolve into a tantrum with wider consequences. Our modelling of a severe market scenario finds a significant impact on growth. But in the context of an extremely rapid recovery, this is not overly concerning. ▀ Various factors suggest the rise in yields could have further to run. The term premium remains low by historical standards. Comparison with the 2013 “taper tantrum” yield surge also supports this view, as does the fact that yields appear to have been well below equilibrium levels when the surge started. ▀ These factors suggest that a further increase in US yields of 50bps‐70bps is not out of the question. Yields would also be likely to rise in other economies, and especially large increases are possible in some emerging markets. ▀ Rising yields can impact growth directly through increases to borrowing costs and indirectly by potentially causing a sell‐off in stocks globally, by diverting capital away from emerging economies, and by inducing fiscal tightening. ▀ Using the Oxford Global Model, we simulate a scenario in which the recent sell‐off evolves into a full‐blown bond market tantrum. Term premia would rise back to 2013 levels, causing equity prices to fall and financial conditions to tighten. ▀ The economic impact would be far worse if rising yields led to a tightening of fiscal policy. We think this is unlikely because rising yields have limited near‐term impacts on debt servicing costs for most governments. But bond holders will need to be wary that central bankers may have more tolerance for rising yields in this environment of expansionary fiscal policy.
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