Long-Bond Rout Sweeps Major Markets, but Demand Remains Firm

Long-term government bond yields in the US, Japan and Germany have climbed to their highest levels in decades, sending bond prices sharply lower. Renewed inflation concerns have added to worries over fiscal strain across major economies, hitting long-dated debt. Even so, sovereign bond markets are still functioning smoothly and demand remains intact.

On Aug. 18, the yield on the 30-year US Treasury reached 5.33%, up almost 40 basis points from late June. French government bond yields climbed to their highest since 2008, while German bund yields rose to their highest since 2011. UK gilt yields were nearing 6%, and Japanese government bond yields were approaching a record high. Rising yields mean falling bond prices.

The jump in long-dated yields has been driven by inflation, competition for capital from technology giants investing in artificial intelligence, and widening fiscal deficits.

Bloomberg said the increase in long-term borrowing costs reflects domestic factors in each country, but the structural drivers amount to a broader global phenomenon.

A common concern across markets is that persistent geopolitical instability will leave economies more vulnerable to supply shocks and inflation pressures. That has increased the premium investors demand to hold bonds for longer periods.

Bondholders are also worried about deteriorating fiscal health as governments ramp up spending, including military outlays in the US and stimulus budgets in Japan.

“The message from the market is: we expect greater uncertainty in the future, so we want a higher yield on long-term bonds,” Justin Onuekwusi of St. James’s Place said.

Long-dated sovereign debt is especially sensitive to the trend of rising government fiscal spending.

Since the pandemic, government bond yield curves around the world have shifted higher overall. Some governments have responded by cutting long-term issuance and shifting to shorter-dated debt. The UK has halted most of its planned long-term bond issuance.

Bloomberg said governments now need to adapt to a world in which they can no longer lock in funding at ultra-low rates for decades.

Another factor pushing up long-term yields is greater reliance on private investors as government bond issuance increases.

Minutes of the Federal Reserve’s June policy meeting showed Treasury ownership is shifting “from relatively price-insensitive public-sector holders to more price-sensitive private investors.” Private investors tend to demand a higher premium to hold long-term bonds to maturity.

“Private investors are more yield-sensitive,” said Anshul Pradhan, head of US rates strategy at Barclays. Over the past decade, changes in the composition of Treasury buyers have lifted the term premium on 30-year US Treasuries by about 90 basis points, he added.

The US fiscal deficit this year is nearing $2 trillion, while the national debt is at risk of surpassing $40 trillion.

Still, strategists at Yardeni Research said there was no reason for the US bond market to panic on Aug. 18.

They said concerns about price pressures had driven the selloff, but long-term breakeven rates — a gauge of market expectations for future inflation — have remained relatively stable in most major markets. Instead, the rise in borrowing costs has been driven by real yields, or the extra compensation investors demand above inflation to hold bonds.

“This repricing in long-term government bonds is an attractive entry point from a real-yield perspective, enough to draw in new money,” said Kelsey Berro, a portfolio manager at JPMorgan Asset Management.

Reuters also reported that demand from government bond investors remains firm. Pension funds, insurers and asset managers with long-term liabilities may view a 5.3% nominal yield on 30-year risk-free US debt as attractive.

“Demand for government bonds is still there. The question is what yield level is needed,” said Jim Barnes, fixed-income director at Bryn Mawr Trust. If 10-year Treasury yields approach 5% and 30-year yields reach their highest levels in decades, more investors will be drawn to risk-free government debt, he said.

Alonso Munoz, chief investment officer at Hamilton Capital Partners, said many Treasury investors believe they need to hold government debt over other investment opportunities. He added that overseas demand also remains supported because US Treasury yields are still significantly higher than those in Japan and many other developed markets.

He said the latest Treasury auction showed no sign that so-called bond vigilantes, who demand higher yields to compensate for fiscal and inflation risks, were aggressively selling government debt. Instead, the sale suggested the market is still functioning well even as the federal government’s borrowing costs are being reset.

Kim Jung-a, guest reporter