Global bond slump sends long-term borrowing costs to highest in decades

Longer-maturity bonds are at the epicenter of investor angst about everything from inflation to the debt-laden artificial-intelligence boom — and governments are paying the price. 

Sovereign borrowing rates are surging around the world. Yields on 30-year US Treasuries rose to the highest since 2007 this week, while French borrowing costs hit the loftiest since 2008 and their German peers traded at 2011 levels. Equivalent gilt yields are approaching 6% in the UK and similar-maturity Japanese ones are close to their all-time high.

While domestic factors have a role in each market, the structural forces driving up yields are global in nature. 

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One fear is that persistent geopolitical turmoil will make economies more prone to supply shocks and inflationary pressures. Bondholders are also worried that governments will fail to rein in spending, pressuring fiscal health. Meanwhile, changes in market structure and demographics are resulting in waning demand from once-steady buyers.

"What the market is saying is: we expect greater inflation or at least greater uncertainty in the future and therefore we demand a higher yield for longer bonds," said Justin Onuekwusi at St James's Place.

Government costs are rising across global bond curves, but long-maturity debt is most sensitive to fiscal matters given its yield is most often the highest.

The concern is significant enough for nations to skew sales away from longer-dated bonds toward shorter tenors. In the UK, authorities have ceased most scheduled long-dated sales. Governments have only limited room for maneuver, though, as they adjust to a world where they can no longer lock in financing costs for decades at rock-bottom rates.

"It is hard to know what level of yield would make the outlook for total returns from long duration fixed income better," said Chris Iggo, chief investment officer at AXA IM Core at BNP Paribas Asset Management. 

"The only thing which might change that is a sudden weakening in economic data or some kind of external shock. The latter appears more likely than the former."

US 30-year yields have climbed almost 40 basis points since the end of June to touch 5.33% on Tuesday, the highest level since mid-2007. That's a headache for President Donald Trump and Treasury Secretary Scott Bessent ahead of midterm elections, with lofty government financing costs feeding through into corporate and consumer loans. 

"November's elections could bring forth more policy risk and will certainly focus market attention on fiscal matters ahead of the usual budget season," AXA's Iggo said. "Ideally, one would not want to be going into an important election period with mortgage rates rising, even if they remain lower than they were in 2023."

The US Treasury market is just one part of the story. The average yield on a benchmark portfolio of investment-grade government bonds has surged to almost 4.5%, the highest in data compiled by Bloomberg going back to 2015. 

Global debt markets have been battered this year by surging energy prices caused by the conflict in the Middle East, which has fueled bets the Federal Reserve and other central banks will tighten monetary policy. 

Rising interest rates will add to the challenging fiscal backdrop of the world's major economies. In the US, interest on the public debt continues to be a key driver of the nation's growing budget deficit. For the fiscal year to date, the tally is $1.17 trillion — a 15% increase, thanks in part to higher yields on Treasuries. 

But the challenge for fixed-income investors predates that, and recent price action suggests other factors are helping to drive long-dated yields higher.

One element acting as a headwind for longer-maturity government debt globally is competition from corporate borrowers. A record pace of bond issuance has added substantial duration supply to US fixed-income markets, especially as tech firms looking to finance AI investment seek to borrow at longer maturities.

These US firms are increasingly tapping overseas bond markets, with one example being Alphabet Inc.'s decision to market a debut Australian dollar debt issue of A$5 billion ($3.6 billion). 

The supply challenge comes just as the buyer base is shifting. Traditionally, many bond markets were supported by demand for long-dated assets from the likes of pension funds seeking to match such securities against their liabilities. Nowadays, many providers are moving away from defined-benefit systems, while regulations are encouraging funds to invest more in stocks. 

More broadly, as government bond issuance ramped up, nations have leaned more on private investors. 

Minutes from the Fed's June policy meeting show officials were briefed on how ownership of Treasuries was shifting from "relatively price-insensitive official-sector holders to more price-sensitive private investors," which could impact the term premium — or the extra yield investors demand to hold longer-dated debt. 

"Official demand is driven largely by policy objectives" while "private investors are more return-sensitive," said Anshul Pradhan, head of US rates strategy at Barclays Plc. This change in buyers over the last decade is responsible for about 90 basis points of the term premium on 30-year US Treasuries, he said.

Although the US's nearly $2 trillion annual deficits leave the national debt on the brink of passing $40 trillion, strategists at Yardeni Research led by Ed Yardeni said Tuesday there's no reason to panic on the US bond market just yet.

"We aren't pushing the panic button," the strategists said. "However, we are closely monitoring whether the bond vigilantes might do so."

In Europe, nerves over elevated government borrowing and persistent inflation headwinds have helped push long-term borrowing costs to multi-year highs. France's 30-year bond yield hit the highest since 2008, with investors turning their attention to the 2027 budget negotiations and next year's presidential election.

Meanwhile Germany could pay the most in 15 years in a syndicated bond sale of 30-year debt on Tuesday, as the nation's financing needs increase. In the UK, gilts were rattled in late July after Prime Minister Andy Burnham unnerved investors by saying he would seek fiscal flexibility. 

In Japan, outright yield levels remain below their peers but their recent increase has been relentless. 

While concern over price pressures has driven much of the bond selloff, long-dated break-even rates — which measure market expectations for future inflation — have remained relatively well anchored in most major markets. Instead, the rise in borrowing costs has been driven by so-called real yields, or the extra compensation investors demand on top of inflation to hold bonds. 

This repricing offers a potentially attractive entry point for fresh cash, according to Kelsey Berro, a portfolio manager at JPMorgan Asset Management.

"Where we have seen more value created and that we like a little bit better would be the long end, particularly in real yields," she said.