Long-term bond yields soar globally on fiscal policy fears
From the U.S. to Japan, long-term borrowing costs for the world’s biggest economies are surging as investors question the ability of governments to cover massive budget deficits.
Thirty-year bond yields this week traded above 5% in the U.S., not far from their highest since 2007, while those in Japan reached the most since records began in 1999, with auctions in both countries running into tepid demand. Long-dated bonds in the UK, Germany and Australia have also come under selling pressure.
Investors are warning that governments can’t keep borrowing at the pace they did when interest rates were close to zero, particularly since trade tensions and sticky inflation have diminished the probability that policymakers will dramatically ease monetary policy. A pullback by central banks and pension funds from bond markets also means a once-dependable source of funding is increasingly absent.
“It’s no wonder that buyers are wary of feeding unsustainable deficit levels for the world’s major economies,” said Kathleen Brooks, research director at online broker XTB Ltd, adding that high-quality corporate bonds look much more attractive.
Parallels are being drawn with the U.S. in the early 1990s, euro-area in the 2010s and UK in 2022 when so-called bond vigilantes drove the cost of money up so much that governments were forced to retrench. Just last month, U.S. President Donald Trump diluted his plan to impose tariffs amid what he called “yippy” bond markets.
The fallout doesn’t stop at bond markets. The sudden rise in the U.S. 30-year Treasury yield on Wednesday triggered a selloff in U.S. stocks, with the S&P 500 Index falling 1.6%, its biggest drop in a month.
Higher government borrowing costs also trickle down to businesses and households, which face higher rates on loans, curbing their ability to borrow or spend. That creates a feedback loop in which budget deficits swell even further amid weaker tax revenues. Central banks may also have to decide if they can switch attention from inflation to growth.
Washington, home to the biggest borrower, is in the spotlight as lawmakers there debate more unfunded tax cuts and after Moody’s Ratings stripped the government of its last top credit rating.
The amount of outstanding Treasuries has skyrocketed from $4.5 trillion in 2007 to nearly $30 trillion today, while the ratio of total U.S. public debt to the size of the economy has risen from about 35% in 2007 to 100% now, according to the Congressional Budget Office.
Embedded in the market is an increase in the premium investors demand to shoulder the risk of owning longer-term U.S. debt. The concern over fiscal policy is also undermining the dollar, which would typically gain when yields rise.
The selloff in Japan’s longer-maturity bonds is particularly acute. The Bank of Japan is scaling back its bond purchases as inflation accelerates, but traditional buyers like the nation’s life insurers aren’t filling the gap left behind.
What Bloomberg’s Strategists Say…
“Liquidity in the JGB market is deteriorating as heightened inflation expectations become entrenched, while disorderly rises in Japanese bond yields leave U.S. and global assets exposed to drops in price,” said Simon White, macro strategist.
Prime Minister Shigeru Ishiba signaled caution over additional spending and said the nation’s financial conditions are worse than Greece’s this week.
“The supply-demand balance has already been disrupted, and since this is a structural issue, I don’t think it will be easily resolved,” said Mari Iwashita, executive rates strategist at Nomura Securities. “If the Ministry of Finance doesn’t act, things probably won’t settle down.”
The rising Japanese yields pose a threat to U.S. Treasuries by making the notes more attractive to local buyers, according to Deutsche Bank AG. George Saravelos, head of FX research at the bank, calls the recent divergence between U.S. yields and the Japanese yen the “single most important market indicator of accelerating U.S. fiscal risks.”
To be sure, there were some reassuring signs of demand for longer-dated debt in other regions. The UK for example sold $5.4 billion of bonds due in 2056 on Tuesday, attracting some $98 billion of orders at a yield around 5.40%.
The UK’s Debt Management Office, which runs bond sales for the government, has already moved to tackle waning demand from pension funds – historically a major buyer of these notes – by tilting sales away from long-maturities. Bank of America Corp. analysts expect other countries to follow suit and shorten their debt in response to changing demand dynamics.
German yields have risen this year following the country’s landmark plan to spend billions of euros on defense and infrastructure over the next decade. The 30-year rate is trading around 3.16%, not far from a recent peak in March of 3.25%.
Pressure on bonds is likely to increase as Berlin starts to amp up issuance to pay for the investment later this year or next, particularly since changes to Dutch pension reforms from the start of 2026 will remove a major historic source of demand.
While Germany’s traditional adherence to fiscal discipline means it has more capacity to ramp up borrowing than many other governments, the challenge is that it will be competing against higher long-end supply around the globe.
“There’s clearly a lack of demand for long end duration everywhere,” said Shaniel Ramjee, co-head of multi-asset in London at Pictet Asset Management.