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Despite easing monetary policy by the world’s major central banks, rising government bond yields will pressure sovereign finances, Fitch Ratings says.

In a new report, the rating agency noted that bond yields in the U.S. and Europe have risen in early 2025, and in the U.K., yields have reached multi-year highs.

“Rising yields are particularly noteworthy given widespread ongoing policy rate reductions,” it said, noting that the upward pressure on yields could be driven by renewed concern about inflation.

“The latest market moves may reflect continuing shifts in the distribution of perceived inflation risks, partly due to expected tariff increases and tighter immigration policies in the U.S., as well as possible fiscal loosening by the incoming Trump administration,” it said.

At the same time, these yield trends “are also consistent with market concerns about the volume of planned government bond issuance to meet their borrowing requirements where fiscal deficits remain large,” it noted.

Whatever the underlying cause, higher government bond yields will increase governments’ funding costs, highlighting the fiscal challenges faced by many sovereigns, the report noted.

“Sustained increases in borrowing costs make it harder to reduce deficits and stabilize or reduce public debt,” it said.

Ultimately, the impact on sovereigns’ credit metrics, “will depend on the magnitude and longevity of the increases,” the report said, “but may also reflect the underlying mix of purely monetary policy-related versus non-monetary considerations influencing market moves.”

For instance, higher yields that are driven by inflation expectations may be accompanied by stronger economic growth, which offsets some of the impact of the higher borrowing costs, Fitch suggested. But yields that reflect “greater fiscal uncertainty or perceived credit risk would be particularly unfavourable for public debt dynamics,” according to the report.

In developed markets, the fiscal fallout from higher yields will depend on individual sovereigns, “debt and deficit starting positions, varying growth prospects and policy commitments and constraints,” it said.

“Sovereigns with high debt/GDP ratios and short average debt maturity profiles typically would be more exposed,” it noted.

In emerging markets, higher U.S. yields, or a stronger U.S. dollar, will raise borrowing costs for governments with dollar-denominated debt, Fitch said.

“Exchange-rate depreciation could raise inflation and reduce the scope for policy rate cuts. It could also complicate management of exchange rates tied to the U.S. dollar and weigh on growth prospects and external finances,” it noted.