Despite the recent sustained sell-off in global bond markets, fixed-income securities remain too expensive to entice investors, according to a new analysis from Barclays strategists. Persistent inflation and governments' reluctance to curb spending continue to exert upward pressure on yields, keeping valuations from reaching compelling levels.

While current trading levels are closer to fair value than at any other point in recent years, the forces driving yields higher have not yet run their course, strategists Ajay Rajadhyaksha and Anshul Pradhan noted in their report. They highlighted that global economic growth has shown remarkable resilience, while inflation remains too sticky to justify central bank rate cuts. Additionally, the capital expenditure cycle tied to artificial intelligence shows no signs of decelerating.

The strategists also pointed out that markets have not yet begun pricing in a genuine fiscal risk premium. Across the world's four most significant bond markets, debt-to-GDP ratios are approaching or exceeding 100%, with deficits growing faster than nominal GDP. Yet there appears to be little political will to address these mounting imbalances, they observed.

Meanwhile, the composition of bond buyers is shifting gradually as Japanese capital flows back home. This transition suggests that new marginal buyers will likely demand higher yields than their predecessors, adding another layer of pressure on fixed-income valuations.

The sole argument for holding a bullish stance on bonds at present rests on the expectation of a sharp economic downturn, a growth collapse, or a major financial market disruption, one severe enough to compel the Federal Reserve to resume its rate-cutting cycle. While such scenarios remain plausible, they are not the strategists' base case.

Whether examining interest rate expectations, inflation trajectories, fiscal conditions, or capital flow dynamics, the analysis concludes that current spot yields on 10-year Treasuries remain insufficient to compensate for the asymmetric upside risks facing the market.