BIS December 2024 Review: Investor Optimism Held, but Bond Markets Signaled Real Fiscal Risk

The Surface: Markets Were Feeling Good

According to the Bank for International Settlements' Quarterly Review published December 10, 2024, investor sentiment was broadly positive during the review period. U.S. stock markets reached all-time highs following the presidential election, credit spreads narrowed to multi-year lows in some segments, and global financial conditions eased on the risk-asset side.

The BIS credited two forces: a U.S. economy that kept surprising to the upside, and a decisive election result that removed near-term political uncertainty. That combination pushed equity and credit markets higher almost everywhere investors were willing to take on risk.

China added a short-term boost of its own. Stimulus announcements out of Beijing sent Chinese stocks surging early in the period and produced brief positive spillovers to equity markets in emerging economies with heavy trade exposure to China. The bounce didn't last.

The Undercurrent: Bond Markets Weren't So Sure

Beneath the equity rally, government bond markets were flashing different signals. U.S. Treasury yields rose sharply, even after the Federal Reserve delivered two consecutive policy rate cuts. The Fed is easing, and yields are still climbing. The BIS flagged this directly.

The explanation, according to the report, was a rise in term premia: the extra compensation investors demand to hold longer-dated debt rather than rolling over short-term paper. Rising term premia, increasingly negative swap spreads, and widening sovereign spreads all pointed to the same concern. Investors were pricing in higher fiscal risk, meaning too much government debt coming to market, and higher geopolitical uncertainty.

Europe moved less dramatically. Weaker economic activity there kept rate expectations subdued, so yields rose by a smaller margin. The Bank of Japan continued its gradual normalization path, with Japanese government bond yields edging higher.

The dollar surged alongside U.S. yields. That surge intensified after the election, tightening financial conditions through the currency channel even as equity markets celebrated.

Hedging Activity Said Investors Weren't Fully Convinced

Even as markets posted gains, the cost of hedging in options markets remained elevated. Investors were buying insurance while also buying stocks, a signal that the optimism was conditional, not unconditional.

The BIS described this as investors remaining "attuned to downside risks." The market was dancing near the edge and people knew it.

Emerging Markets Absorbed the Pressure

The strongest opposing read on this period is that the U.S. financial strength came partly at the expense of the rest of the world. That concern is well-founded in the data. Across most emerging market economies, the review period was painful: equity markets fell, currencies depreciated against the dollar, and bond yields rose.

The BIS noted that higher dollar volatility also reduced incentives for currency carry trades, a strategy that relies on stable exchange rates. When carry trades unwind, capital tends to leave emerging markets quickly.

China's slowing growth showed up in commodity prices, which stayed depressed. This was a knock-on effect felt by commodity-exporting developing economies. The China stimulus bounce in their equity markets was real but short-lived, as the BIS documented.

For advocates of a multipolar financial system or for policymakers in developing countries, this dynamic is a persistent grievance: U.S. fiscal and monetary decisions export consequences globally, and emerging economies absorb the volatility with fewer tools to respond. That concern is legitimate and the data in this review supports it, even if the BIS frames it descriptively rather than prescriptively.

What the Fiscal Signal Actually Means

The BIS did not editorialize on U.S. fiscal policy, but the data it presented shows the picture clearly. Term premia rising while the Fed cuts rates, swap spreads going negative, sovereign spreads widening. These represent investors demanding higher returns to absorb government debt supply. In plain terms, borrowing is getting more expensive even when the central bank is trying to make it cheaper.

That tension doesn't resolve itself. Either governments reduce debt issuance, growth accelerates enough to make the debt manageable, or yields stay elevated and the cost of carrying that debt compounds. The BIS review does not predict which outcome follows, but the December 2024 snapshot shows all three paths still open and bond markets pricing in genuine uncertainty about which one prevails.

The unresolved question the BIS left on the table: whether the rising term premia and fiscal risk signals visible at end-2024 represent a temporary repricing or the early stages of a more sustained shift in how investors value sovereign debt from developed economies. That question remains open as of June 28, 2026.