Key takeaways Private investors are now pricing bonds: Central bank retrenchment is shifting marginal pricing power to yield-sensitive private investors, likely keeping bond yields elevated. Corporate bonds may offer better returns : Corporate bonds look more attractive than Treasuries over the next 12 months. Structural headwinds support a higher yield outlook: Aging demographics, larger fiscal deficits and persistent inflation expectations are buoying bond yields. Higher bond yields driven by anti-bond narratives are improving income prospects for investors. Bond yields are at recent highs. Investors are demanding more compensation for lending to governments due to concerns over inflation and budget deficits. There has also been a remarkable surge in corporate bond issuance to fund investments in artificial intelligence (AI). The flip side of higher yields is that – all else being equal – they have improved the jumping-off point for total returns. Over the next 12 months, we expect bond returns to be slightly better than cash. Within fixed income, we like owning investment grade corporate bonds in lieu of government bonds to bolster portfolio returns. Yields are also rising against the backdrop of less activist central banks. As a case in point, the U.S. Federal Reserve (Fed) – under new Chair Kevin Warsh – is eschewing forward guidance or sharing a framework for how the central bank might approach future developments in inflation or the labour market. In the absence of such guidance, the market is starting to demand more risk premiums in the form of both higher yields and steeper yield curves. U.S. Treasury Secretary Scott Bessent is also overseeing a relatively activist Treasury Department, which has intervened in Argentina's debt crisis, coordinated yen stabilization with Japan and expanded bond buyback programs. This shift partly reflects the vacuum left by central bank retrenchment but also likely reflects Bessent's own policy preferences. At the same time, the current U.S. administration’s actions on trade and foreign policy are raising questions about the trustworthiness of the country as an ally and trading partner. By extension, this calls into question the safety and security of what has been the world’s pre-eminent safe asset for several decades: U.S. government debt. What is more, the fiscal deficit is enormous for a country not in recession. To be sure, more debt is not a sure bet for higher yields – indeed, global debt outstanding for governments, households and corporations rose steadily for decades and yet yields fell. Part of this dynamic reflected the defeat of inflation in the 1980s and credible inflation targeting established by global central banks. It also reflected the global savings glut as newly affluent emerging markets sought out perceived safe assets to invest in. In the wake of the 2008 global financial crisis – which brought another wave of debt issuance to prop up economies – governments generally found steady buyers in central banks and the private sector as inflation dropped to very low levels. Now, though, the world has changed. The surge in inflation during and after the COVID-19 pandemic has ratcheted up the risk of higher and more variable inflation than most investors are used to. Fiscal deficits are also structurally larger. More recently, a subset of corporate debt issuers has piled into debt markets as well – hoping to use bonds to fund massive investments in AI infrastructure. The buyers of government debt have also changed – an aging global population transition into dissaving phase means there is more demand for safe assets. Central banks are also actively working to reduce the size of their balance sheets. The consequence of all this is that private investors are now the dominant buyers of new debt. This gives them greater marginal pricing power. They are more price sensitive, demanding higher yields in exchange for the higher risks they perceive. United States Since the last edition of the Global Investment Outlook, Kevin Warsh has taken over as chair of the Fed – starting in June. We previously wrote that Chair Warsh held strong views about the conduct of monetary policy – on that count he did not disappoint, launching no fewer than six task forces to reshape the conduct of monetary policy at the world’s most important financial institution. Despite his strongly held views about the economy, Warsh must contend with both the Fed’s Federal Open Market Committee (FOMC)’s membership and an economic trajectory that precedes his tenure. The Fed chair also has only one vote on the committee. While the Fed did vote to keep rates unchanged for Warsh’s first two meetings, it is becoming clearer that many FOMC members are uncomfortable with the combination of too-high inflation and an economy that is mostly feeling the effects of stronger growth from investment in AI. That view also looks increasingly at odds with Chair Warsh’s preferred long-run view that higher productivity will eventually lead to lower inflation. For our part, we expect the Fed will need to hike rates twice over the next year to cool down inflation. For bonds, we forecast the 10-year bond yield to be 4.75% in a year’s time, which is slightly more bullish than forward market pricing. Canada The Bank of Canada (BOC) did not change its policy rate in July, its sixth consecutive hold at 2.25%. Policymakers communicated a more upbeat outlook on the economy, raising forecasts for growth. Governor Tiff Macklem expressed increased confidence in Canada’s economic recovery. However, too-high inflation remains a concern against the backdrop of trade uncertainty. The historic reset of Canada’s relationship with its largest trading partner – the U.S. – is a significant source of uncertainty for the growth and inflation outlook. Trade negotiations collapsed on Aug. 21, after which the U.S. and Canada subsequently imposed retaliatory tariffs on each other. This latest escalation reinforces the case for the BOC to keep rates low for an extended period, not least because tariffs and trade uncertainty seem likely to discourage a meaningful pickup in either business investment or consumer confidence. To be sure, significant efforts by the federal and provincial governments to offset the worst impacts of the tariffs may cushion growth, but they may also spur more deficit spending. We expect the BOC to raise rates just once over the next year, to 2.50%, conditional on the stabilization of trade relations. Over the same period, we expect the Canadian 10-year government bond yield to be around 3.75% (also below forward pricing). United Kingdom In the UK, we expect fewer hikes from the Bank of England (BOE) than market pricing implies. We believe the economy is on a relatively weak footing, with gross domestic product (GDP) contracting in the most recent quarter and unemployment rising to 5.3%. At the same time, inflation is above the BOE’s target and the extent to which price increases from the most recent energy shock will feed through into other prices remains uncertain. In July, the BOE’s split rate decision, with six governors voting to stay on hold and three voting for a hike, reflects this uncertain policy outlook. Meanwhile, the UK government’s persistent budget deficits are keeping a structural risk premium embedded in UK government bonds and progress to curtail the deficit is unlikely this early in Prime Minister Andy Burnham’s tenure. Compounding matters, the BOE’s continued efforts to shrink its balance sheet by reducing its holdings of gilts will also force the market to absorb a higher share of outstanding bonds. We forecast one rate hike followed by an extended pause as growth concerns weigh more heavily on the BOE’s decision making. We maintain our forecast that the 10-year gilt yield will hold around 5%, as upward supply pressure from BOE balance-sheet shrinkage and inflation uncertainty offset the downward pressure on yields from fewer policy-rate hikes than the market expects. China Chinese government bond yields continue to decouple from their global peers. While global bond yields have risen significantly over the past several years due to inflation and fiscal concerns, the 10-year Chinese government bond (CGB) yield is near all-time lows of 1.70%. Demand for CGBs is supported by a dovish central bank, limited alternatives for household savings and a lacklustre domestic economy. From a valuation perspective, however, current yields suggest bonds are expensive. The central bank’s rhetoric for a “moderately loose” stance has not translated into additional interest-rate cuts. The main policy rate has not changed since May 2025 even as economic growth slowed to just 4.3% in the second quarter of this year, below the government's target of 4.5% to 5.0%. Barring a more substantial slowdown in growth, we believe monetary policymakers are unlikely to provide additional monetary easing. What is more, inflation now appears to be rising again – albeit from a very low level. The government’s efforts to support the economy via fiscal stimulus are also pushing up bond supply. Over the next several quarters, we believe accelerating fiscal expenditures and a large debt refinancing calendar could push up yields. We expect 10-year government bond yields to drift toward 1.85% to 2.05% over the next year, and the People’s Bank of China (PBOC) to keep policy rates on hold over the same period. Japan We maintain our view that Japanese government bonds (JGBs) are an attractive opportunity for investors. At 4.05% in late August, the 30-year JGB yield is at multi-decade highs and – on a currency-hedged basis – is the highest yield offered among developed-market peers. Investors have steadily pushed up long-maturity bond yields in Japan over the past several years, showing impatience with the slow pace of monetary tightening by the Bank of Japan (BOJ) in the face of inflation. Concerns regarding the long-run sustainability of the government’s finances have also periodically pushed up long-term yields. To be sure, the case for the BOJ to hike interest rates appears strong: core inflation continued its upward trend in July, accelerating to 1.9% annually from 1.7% in June. At this point, however, we think market expectations for the BOJ to hike rates to between 2.50% and 3.00% over the next several years are too aggressive: Japan’s economy can likely only grow at around a 1.0% pace per year in the best case, and policy rates near 3.00% would likely prove very restrictive. On balance, we believe the steepness of Japan’s yield curve offers a sufficient return buffer to absorb modest rate hikes without sparking another bout of much higher interest rates. We forecast the BOJ policy rate to reach 1.50% by mid-2027 and the 10-year JGB yield to fall slightly to 2.75% (versus 3.20% priced in forward market), as investors pare back their expectations for tightening and inflation pressures gradually ease. Eurozone The ECB faces a genuine policy dilemma: while inflation is high at 3.0% in 2026, mostly driven by the increase in energy costs due to the U.S. war with Iran, relatively soft economic growth in most member states argues against a more substantial tightening of monetary policy. We judge that a policy rate of 2.50% would represent an appropriate policy response to inflation that is 50 to 100 basis points above the ECB’s 2% target. Unlike the last time the ECB was hiking rates, in 2022–23, the eurozone economy is projected to expand by just 0.8% in 2026 – not exactly a fast pace. Contributing to that muted growth picture, real household incomes are stagnant, savings rates are elevated and consumer confidence is subdued. However, increased government spending – particularly by Germany and via the European Union (EU)’s Recovery and Resilience Facility – is likely to support growth. In Germany specifically, many of the structural reform programs that are scheduled for implementation in January 2027 should bring forward meaningful spending. At the same time, elevated energy prices and intensifying industrial competition from China warrant a cautious stance on German growth prospects. Over the next 12 months, alongside the forecast ECB rate hike, we expect German 10-year bund yields to be around 3.25% (again, below forward pricing). Canadian corporate bonds are in focus as hyperscalers bring new opportunities and risks The Canadian corporate bond market is changing. Major U.S. technology companies – including those often referred to as hyperscalers – are issuing Canadian-dollar-denominated debt at a rapid pace. The catalyst for this change is the surge in capital expenditure related to AI. Technology companies such as Amazon and Alphabet (the parent company of Google) are using global debt markets to fund huge investments. Some of these markets, like Canada’s, are being used by these companies for the very first time. The scale of these deals for issuers that have never issued Canadian-dollar debt before is remarkable. Amazon’s C$14 billion debt deal earlier this year was the biggest Canadian-dollar corporate bond deal ever, while Google’s C$8.5 billion deal was not far behind. In no time at all, it seems, U.S. technology companies have become major constituents of the Canadian bond index. Other well-established U.S. technology companies – such as IBM and AT&T – are also returning to the Canadian bond market for the first time in several years, raising C$2.75 billion and C$2.25 billion respectively. Historically, the Canadian corporate bond market was smaller and dominated by domestic financial, utility and energy companies. To be sure, these companies still account for over 60% of the market – but issuance by hyperscalers means their share is shrinking. The increased presence of non-Canadian issuers carries important implications for investors in Canadian-dollar corporate bonds. On the positive side, it offers the opportunity for diversification away from the market’s traditional concentration in a narrow set of sectors. Hyperscaler bonds also currently trade at attractive valuations relative to their credit quality, offering the prospect of higher risk-adjusted returns. The ability of issuers to launch large bond deals is also a litmus test for the domestic market’s ability to get deals done. In turn, this may attract a broader and more diversified range of global issuers to the Canadian market. This change also brings new risks, however. Compared to other issuers in the market, hyperscalers issue a lot of long-maturity bonds, which are more sensitive to changes in yields. As a result, including hyperscaler bonds in a portfolio may add more risk than their weight alone would suggest. If interest rates rise, the price of these bonds might decline more than shorter-maturity bonds. A rising share of global issuers means we also expect credit spread volatility in Canada to more closely mirror offshore markets, where spread volatility has historically been higher. Finally, should current trends continue, the increasing issuance from hyperscalers could lead to less diversification rather than more as they could take up a large share of the market. Under some scenarios, hyperscalers could account for more than 20% of the Canadian corporate bond market by the end of this decade. In short, the integration of U.S. technology hyperscalers into Canada’s corporate bond market bears careful monitoring and active management; their entry presents investors with an opportunity for additional diversification and yield, as well as new risks. Recommendations We expect Canadian government bonds to perform about the same as their global counterparts on a currency-hedged basis. Regionally, we continue to recommend being overweight Japanese government bonds against their German counterparts. We also recommend being overweight high-quality investment-grade corporate bonds relative to government bonds.