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Bond yields are on the rise - is this a return to normal?

Yields on high-grade sovereign debt seem to finally be on the increase, a factor that may bring relief to investors, but could put governments under pressure.

Although trading lower Wednesday morning, U.S. Treasury yields traded at their highest since June earlier in the week while German 10-year bund yields turned positive at the end of last week for the first time since June.

The yield on 30-year Japanese government bonds have also risen fairly steepily, returning around 0.5 percent to investors, well above the June lows of around 0.02 percent.

Chris Ratcliffe | Bloomberg | Getty Images

Bond yields have been suppressed for years thanks to central bank policy. But recent speculation about a possible Federal Reserve interest rate rise, as well as disappointing news from the Bank of Japan and European Central Bank, have pushed down bond prices, which causes yields to rise.

"We have seen a further steepening of various yield curves, which in itself is not necessarily bearish if the cause is higher inflation and growth expectations. However, that is not the case and this move is being caused by the Bank of Japan looking to change the structure of its asset purchases, largely as a result of how poorly its asset purchase program has worked thus far," said Chris Weston, chief market strategist, in a note.

"Throw in recent commentary (or should I say lack of) from the ECB that throws into question the sustainability of the ECB's asset purchase program and you have a move higher in longer-term bonds, that no one is positioned for."

Low yields have long been a pressing issue, as it forces investors to look elsewhere around the world and take on more risk. According to Fitch Ratings, sovereign bond investors are receiving $500 billion less in annual income now compared to 2011.

"[The search for yield is] pushing down yields for issuers such as emerging market sovereigns and high-yield corporates with weaker credit profiles," Robert Grossman, head of macro credit research at Fitch Ratings, said in a research note.

"Some income-dependent institutions such as insurers and pension asset managers are likely to face increasing credit risk as yields on high-grade bonds diminish."

The main beneficiaries of low bond yields have been the issuers themselves. Governments have been able to borrow very cheaply for years, in many cases offering bonds with negative yields meaning investors are paying to lend money to issuers.

If bond yields were to remain low, it may encourage governments to increase public spending, though this comes with its own risks.

"[Low borrowing costs have] the potential to lead more governments to pivot to fiscal stimulus as a tool to boost economic growth," Grossman said.

"Persistence of ultra-low sovereign borrowing costs could eventually lead to higher government debt levels and increasing leverage, particularly if global growth remains sluggish and doubts over the efficacy of monetary stimulus grow."

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