Fitch Ratings has revealed that rising government bond yields, despite recent policy rate cuts by major central banks, signal fiscal challenges for many sovereigns, including Ghana, as 2025 unfolds.
In a report titled “Rising Bond Yields Point to Fiscal Challenges for Sovereigns”, the UK-based ratings agency noted that the impact of these increases on sovereign credit metrics will depend on their scale and duration. The report also emphasized that the factors driving these changes include both monetary policy-related and non-monetary considerations.
The analysis highlighted that bond yields in the US and the eurozone climbed to multi-month highs at the start of 2025, while UK gilt yields reached their highest levels in years. Fitch attributed this to lingering inflation risks and rising real interest rates, which have contributed to a higher US term premium. This dynamic drove up US Treasury yields in the fourth quarter of 2024, even as the Federal Reserve cut the federal funds rate.
Notably, US 10-year Treasury yields have risen by over 100 basis points since the Federal Reserve began reducing policy rates in September 2024, with the yield curve continuing to steepen. Fitch pointed out that these rising yields stand out in the context of widespread rate cuts by central banks globally.
The report suggested that the market movements may reflect ongoing shifts in perceived inflation risks. These shifts are partially driven by anticipated tariff increases and stricter immigration policies in the US, along with expectations of fiscal loosening under the incoming Trump administration.
At the same time, the report linked the yield increases to concerns over the large volume of planned government bond issuance required to finance fiscal deficits. These deficits remain significant for many sovereigns, further pressuring bond markets.
“Sustained increases in borrowing costs make it more difficult to reduce fiscal deficits and stabilize or lower public debt levels,” Fitch explained. “Higher term premiums arising from fiscal uncertainty or perceived credit risk are particularly harmful to public debt dynamics, as they lack the offsetting benefits of higher nominal GDP growth that would accompany yields driven by stronger economic growth or inflation.”
The report also noted that strong nominal GDP growth had previously helped developed market sovereigns manage the impact of rising yields as central banks tightened monetary policy from 2022. However, the current context of fiscal uncertainty poses a more severe challenge to countries like Ghana, where public debt levels remain a pressing issue.
SOURCE: JoyBusiness
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