Fitch Ratings has raised concerns about rising government bond yields despite policy rate cuts by major central banks.
In its latest report, “Rising Bond Yields Point to Fiscal Challenges for Sovereigns,” the UK-based firm emphasizes that these trends underscore significant fiscal challenges for many sovereign nations, including Ghana, in 2025.
Despite reductions in policy rates by the US Federal Reserve and central banks in the eurozone and the UK, government bond yields have surged. US 10-year Treasury yields, for instance, have risen by over 100 basis points since the Federal Reserve began cutting rates in September 2024. The Treasury yield curve continues to steepen, reflecting market concerns about inflation risks and fiscal uncertainty.
According to Fitch, the increases in bond yields are particularly striking given the widespread trend of policy rate reductions. UK gilt yields have reached multi-year highs, while US and eurozone yields climbed to multi-month highs at the start of 2025.
The firm attributes the upward trajectory in yields to inflation risks and pressure on real interest rates, which pushed the US term premium higher in the fourth quarter of 2024. Inflation expectations, driven by anticipated tariff increases and tighter immigration policies in the US, as well as the potential fiscal loosening by the incoming Trump administration, have contributed to this phenomenon.
Fiscal Challenges and Sovereign Credit Metrics
Fitch highlights the dual impact of rising bond yields: they not only reflect market dynamics but also have significant implications for fiscal management. Sovereigns face challenges in reducing fiscal deficits and stabilizing public debt in the face of sustained increases in borrowing costs.
“Sustained increases in borrowing costs make it harder to reduce deficits and stabilise or reduce public debt, all else equal,” the report states. The firm warns that higher term premiums driven by fiscal uncertainty or perceived credit risk are particularly detrimental to public debt dynamics. This is because such increases lack the offsetting benefits of higher nominal GDP growth, which could otherwise mitigate the debt ratio.
Implications for Ghana and Other Sovereigns
The situation is particularly relevant for nations like Ghana, which already grapple with large fiscal deficits and significant borrowing needs. Rising bond yields could further exacerbate fiscal pressures, complicating efforts to manage public debt. Ghana’s economic outlook in 2025 could be shaped by how these global dynamics intersect with its domestic fiscal policies and debt management strategies.
For emerging markets, including Ghana, the challenge is compounded by their reliance on external borrowing. Rising yields in developed markets could result in higher risk premiums for emerging market bonds, leading to increased borrowing costs. This dynamic could strain government budgets, hinder investment in critical sectors, and potentially slow economic recovery efforts.
Fitch points out that strong nominal growth in developed markets has helped limit the adverse effects of rising yields on sovereign debt ratios since central banks began tightening policies in 2022. However, the report cautions that this cushion may not be sufficient to offset the challenges posed by current fiscal dynamics.
The relationship between nominal GDP growth and bond yields is crucial. While stronger growth expectations can lead to higher yields, they also contribute to higher revenue generation, which can mitigate debt ratios. In contrast, yields driven by fiscal uncertainty or perceived credit risk lack this positive feedback loop, exacerbating fiscal vulnerabilities.
Fitch underscores the role of market sentiment in driving yield trends. Concerns about the volume of planned government bond issuance to meet borrowing requirements are a key factor. Large fiscal deficits necessitate significant borrowing, which, in turn, fuels market apprehension and drives yields higher.
For Ghana and other sovereigns, navigating this balance will require robust fiscal policies, effective debt management strategies, and proactive engagement with international financial markets.
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