Yields on global government bonds have reached multi-year highs. What's going on?

Government borrowing costs are rising rapidly around the world. Yields on 30-year U.S. Treasury bonds, as well as bond yields in France and Germany, have reached their highest levels in several decades. Governments in major economies are facing a sharp rise in the cost of debt due to structural changes in the economy, inflation risks, and an exodus of traditional investors, according to Bloomberg. But some analysts say it is too early to panic.

The yield on 30-year U.S. Treasury bonds surpassed 5.32% this week, reaching its highest level since 2007. A similar trend is observed in the markets of other developed countries: borrowing costs in France have reached their highest level since 2008, German bond yields have returned to 2011 levels, British bond yields are approaching 6%, and Japanese long-term bonds are trading near their all-time highs. As a result, the average yield on a global portfolio of investment-grade government bonds has reached 4.5%—a record high for the entire period of Bloomberg’s data collection since 2015.

Investors are also shorting French bonds—betting on a decline in their value ahead of a new showdown in parliament over the 2027 budget in the run-up to the presidential election, according to Bloomberg.

The current sell-off in the debt market is driven by a combination of global factors, according to Bloomberg. Geopolitical tensions are disrupting global supply chains, which is constantly pushing prices higher. In addition, investors are spooked by bloated government spending: because governments are spending too much, central banks are forced to keep interest rates high for longer, making credit expensive for the entire economy.

These challenges are compounded by a shift in the investor base. Traditionally, demand in many bond markets has been supported by pension funds, which purchased long-term assets to meet their obligations. However, they are now moving away from defined-benefit pension plans, and regulatory requirements are encouraging them to invest more in stocks, according to Bloomberg.

In a broader sense, as the volume of bonds issued increases, governments are forced to rely more and more on private investors. As noted in the minutes of the U.S. Federal Reserve’s June meeting, the ownership structure of Treasury securities is shifting “from relatively price-insensitive holders in the public sector to more price-sensitive private investors.” This leads to an increase in the term premium —the additional return that investors demand for holding long-term debt.

The corporate sector is putting additional pressure on the market. Governments are having to compete fiercely for investor funds with technology companies, which are actively raising long-term financing for AI projects. As the cost of “long-term” money rises, finance ministries are forced to increase their issuance of short-term debt, but the room for such maneuvering is extremely limited.

— “It’s hard to say what level of returns would improve the outlook for overall returns on long-term fixed-income investments. The only thing that could change this is a sudden deterioration in economic data or some kind of external shock. The latter seems more likely than the former,” says Chris Igg, Chief Investment Officer at AXA IM Core. The upcoming U.S. congressional midterm elections in November could bring additional political risks and shift the market’s focus to fiscal policy, he added.

— Despite rising yields, there is no reason yet to panic in the U.S. Treasury market, according to analysts at Yardeni Research, as quoted by Bloomberg. “We maintain the view that U.S. Treasury yields should remain within the normal range of 4–5% without any negative consequences for the economy or corporate earnings. However, as yields approach the upper end of this range, we are monitoring the activitiesof the ‘bond vigilantes’ (investors who sell government bonds during difficult periods . — Oninvest), “more closely,” they wrote.

— “Official demand is largely driven by policy objectives, whereas private investors are more sensitive to yields,” notes Anshul Pradhan, head of U.S. rate strategy at Barclays. According to his assessment, it is precisely this shift in buyers over the past decade that has added approximately 90 basis points to the term premium on 30-year U.S. Treasury bonds.

— “The prospect of rising imported energy inflation and growing pressure on the Bank of Japan to tighten policy do not provide much incentive to intervene and buy Japanese government bonds. Japan was supposed to serve as an anchor for global interest rates, and the risk of rising yields on its securities increases the risk of a global revaluation,” says Prashant Newnah, senior interest rate strategist for the Asia-Pacific region at TD Securities.

— “We see greater value being created and have a slight preference for the longer end of the curve, especially in terms of real returns. Ultimately, correlations will support the portfolio if we see slightly greater volatility in risky assets,” summarizes Kelsey Berro, portfolio manager at JPMorgan Asset Management.

This article was AI-translated and verified by a human editor