Valentijn van Nieuwenhuijzen: Is the bond market panicking, or are we?

September 22, 2026

By Valentijn van Nieuwenhuijzen, Investment Manager and former CIO NN Investment Partners/Goldman Sachs Asset Management

I started my career as a professional investor in the 1990s, working in the Global Fixed Income team at ING Investment Management. Neither the team nor the asset manager exists anymore, but the lessons I learned there about bond markets have stayed with me ever since.

Theory had taught me that financial markets would always efficiently ‘price’ what was happening in the underlying economy. In practice, I sometimes saw something different. Despite enormous differences between European countries in growth, inflation and government debt, interest rates across Europe converged rapidly in the run-up to the introduction of the euro. At the same time, high interest rates in the US, where the government was running budget surpluses, and extremely low rates in Japan, where deficits and debt were exploding, didn’t seem to make much sense.

The market forces you to learn

These observations forced me to rethink some of what I had learned. Standard economic theory was useful, but the credibility of policymakers and central bankers often turned out to be even more important. The belief that the euro and the ECB would actually happen, and that countries would genuinely reform their economies, drove the convergence of European interest rates. Years later, during the euro crisis, the opposite happened. The belief in convergence disappeared. Then ECB President Mario Draghi saved the eurozone with his famous words: ‘whatever it takes.’ No model could really explain why it worked, but Mr Market listened to Super Mario.

Another crucial lesson was the importance of understanding the balance between the supply of and demand for capital. In the US during the 1990s, there was the fleeting hope that government debt might disappear. But the ‘new economy’ boom created such enormous demand for capital from businesses and households that interest rates remained relatively high, between 5% and 7.5%. In Japan, the opposite happened. The government borrowed ever more, but companies and households were simultaneously reducing debt and saving aggressively. The domestic supply of capital therefore exceeded demand, pushing interest rates down to the lowest levels in the world, to below 2% by the end of the 1990s.

What can we learn from this today?

These lessons also help us understand today’s bond market. Interest rates around the world have risen to levels we haven’t seen for at least 15 years. The media is full of concerns about inflation and rising government debt. Understandably so, but the bond market itself seems considerably less worried.

One indication is what the market is pricing for long-term inflation. Current market-implied inflation expectations¹ are around 2.2% in both the US and Germany and around 2% in Japan.

In other words, remarkably close to central bank targets. This is hardly the sign of a deeply worried market.

Another way to look at it is to compare long-term interest rates with expectations for real economic growth plus inflation or nominal growth. In the US, expected nominal growth is around 4.25%, in Europe around 3.25%, and in Japan around 2.5%. Current 10-year government bond yields are only somewhat higher: roughly 0.75%-points above that level in the US, 0.25%-points in Germany and 0.5%-points in Japan. Again, these are hardly the kind of gaps you would expect if investors were demanding huge additional risk premiums because of deep uncertainty about long-term growth and inflation.

A third way to assess that risk premium is to look at the difference between 2-year and 10-year government bond yields. In the US and Germany, that difference is only around 0.25%-points, historically a relatively low level. Even in Japan and France, countries that regularly attract more alarming headlines, the gap between 2-year and 10-year yields is around one percentage point, roughly in line with the 40-year historical average. Also here, it doesn’t look like panic. If investors were genuinely worried about inflation and public finances spiralling out of control, they would demand much higher risk premiums.

A new regime

Something else is going on. After a 30-year hibernation, the Japanese economy is finally waking up. Investment and consumption are rising again, while saving is declining. For decades, Japan was an enormous net saver, supplying capital to the rest of the world. That supply is now shrinking.

At the same time, the investment drought that characterised the US and European economies for much of the period since 2010 appears to be over. We are seeing an enormous investment boom around AI, while the energy transition and higher defence spending are also demanding increasing amounts of capital. When the global supply of capital falls while demand rises, prices should rise. In bond markets, that means higher interest rates.

So yes, the rise in interest rates is striking, and households and companies taking out new mortgages or loans feel its impact directly. Some economists, politicians and commentators also seem to be getting increasingly nervous.

But the market itself certainly isn’t panicking yet. The market sees economies growing more strongly than expected and central bankers raising interest rates to contain inflation. And the market still believes they will succeed. Even deteriorating government finances appear to worry the market less than many commentators would have us believe. What the market is telling us is that we have entered a new inflation and investment regime, and that it is still too early to lose faith in policymakers.

Listen to the market

At the beginning of my career, I learned that it pays to listen carefully to Mr Market. Especially when we are in the middle of a transition towards a new economic regime. As a person, economist and investor, that lesson has served me well for the past 30 years. There is never any guarantee that it will do so again, but for now the market is at least telling us that it is too early to panic. Perhaps we should take some inspiration from Japan’s revival and apply a little more Zen to our own analysis of the economic world around us.

More columns by Valentijn van Nieuwenhuijzen

¹ Long-term inflation expectations can, among other things, be derived from the yield difference between nominal government bonds and comparable inflation-linked bonds, commonly referred to as ‘break-even’ spreads.