Joachim Klement can envisage a scenario where central banks redeploy QE to suppress yields

Federal Reserve Chairman Kevin Warsh $(CUL3)$ talks with Tiff Macklem (L) Governor of the Bank of Canada, and Andrew Bailey (R) Governor of the Bank of England at the Jackson Hole Economic Symposium August 28, 2026 in Jackson Hole, Wyoming. Central banks could intervene in bonds markets if needed to reverse the rise in yields, one strategist argues.

The surge in government bond yields that has alarmed investors may reverse itself has cyclical forces overwhelm fears over the sustainability of debt, one strategist argues on Thursday.

Long-term risk premia have been rising

Strategists at Panmure Liberum led by Joachim Klement acknowledge the long-term danger posed by "excessive deficits and rising debt mountains," but there are contingencies that might take bond markets by surprise in the next year.

For example, in the first half of 2027, Panmure expects inflation to fall significantly, affording central banks the room to lower interest rates. Another wild card may be dealt in the shape of a possible slowdown or even a "collapse" in the AI boom that could trigger recession in the U.S., the U.K. and the eurozone, prompting a flight to safety and lowering their bond yields.

What fixed-income investors may be overlooking most, though, are the options available to central banks if they become alarmed by long-term bond yields rising too far, too fast. If this were to happen, Klement expects that they may resort to quantitative easing again to suppress yields or even resort to yield curve control, whereby the central bank targets a yield and intervenes in the market to hold it at that level.

Bond markets have been registering alarming milestones with sovereign credits like Germany BX:TMBMKDE-10Y, Australia BX:TMBMKAU-10Y, France BX:TMBMKFR-10Y and Japan BX:TMBMKJP-10Y seeing their yields soar to highs not seen for up to forty years in some instances, in addition to the rise in U.S. bond yields.

It's not necessarily only negatives driving yields higher. In a desk note to clients dispatched Thursday, Deutsche Bank's currency strategist George Saravelos pointed out that global growth has proven amazingly resilient in 2026 with the strongest run of positive data surprises recorded since the global financial crisis. There's a big, global capex cycle at work, a boom in defense spending and the development of energy autonomy in the newly-deglobalized world.

Saravelos notes that for the first time ever, outside of the global financial crisis, equity inflows into the U.S. are larger than those into Treasurys.

For the first time, America is equity financed

On Thursday 10-year U.S. Treasury notes BX:TMUBMUSD10Y were yielding 4.77% while German bunds were unchanged at 3.39% and JGBs a fraction better at 2.96%.

-Jules Rimmer