Global Bond Market Storm: Long-Term Yields Near Multi-Decade Highs

Original author: Dong Jing

Source: Wall Street Journal

The global sovereign bond market is experiencing its most intense selling wave in decades, with long-term yields continuing to rise under the triple pressure of inflation concerns, fiscal expansion, and structural demand contraction, causing government financing costs to surge sharply.

The U.S. 30-year Treasury yield reached 5.33% this week, the highest level since 2007; France’s comparable bond yield rose to its highest since 2008; Germany’s 30-year bond yield returned to 2011 levels; the U.K.’s comparable gilt yield neared 6%; and Japan’s 30-year Treasury yield climbed to its highest since 1999.

Wall Street Journal reported that the composite yield on global government bonds has returned to 2007 levels. Additionally, data compiled by Bloomberg shows that the average yield on investment-grade sovereign bond benchmarks has surged to approximately 4.5%, the highest level since records began in 2015.

This selling wave is not an isolated event in a single market, but rather driven by global structural forces—ongoing geopolitical instability intensifying supply shocks and inflation risks, weakening fiscal discipline across governments, and a systemic decline in demand from traditional long-bond buyers. Analysis suggests that the pricing logic for long-term fixed-income assets is being rewritten; for the Trump administration, elevated financing costs have become a political pressure ahead of the midterm elections.

The epicenter of this bond market storm is the long end. Since the end of June, the U.S. 30-year Treasury yield has risen by nearly 40 basis points, reaching 5.33% during Tuesday’s trading session before slightly pulling back to 5.28%, where it remains near its highest level in nearly two decades.

Long-duration bonds led the decline because they are more sensitive to risk factors such as inflation. Justin Onuekwusi, Chief Investment Officer at St. James's Place, said:

The market is signaling that we expect higher inflation in the future, or at least greater uncertainty, so we demand higher yields for holding long-term bonds.

Bloomberg macro strategist Skylar Montgomery Koning noted that a key difference in this cycle of structural yield increases is that deficit expansion is occurring against a backdrop in which the economy is not clearly weakening.

Typically, a widening deficit accompanies economic softness, leading to lower policy rates that provide a buffer for bond markets. However, the current procyclical fiscal expansion means the government is borrowing more at a time when interest rates are already high, pushing yields even higher.

European bond markets are equally unable to remain unaffected. France’s 30-year government bond yield has risen to its highest level since 2008, as investors focus on the political uncertainty stemming from the 2027 budget negotiations and next year’s presidential election.

According to Bloomberg, informed sources said Germany issued 30-year bonds via a syndicate on Tuesday at the highest interest rate in 15 years.

In Japan, despite absolute yield levels still being lower than those in other major markets, the 30-year government bond yield has continued to rise strongly, reaching its highest level since 1999.

In response to the sharp rise in long-term funding costs, some countries have begun adjusting their bond issuance strategies by shifting toward shorter-term instruments.

UK authorities have suspended most of the originally planned long-term bond issuances. However, governments have very limited room for maneuver—under the new environment where they can no longer lock in financing costs for decades at ultra-low interest rates, policy options have been significantly narrowed.

For the Trump administration, the sustained rise in long-term bond yields is no longer just a market issue but a political risk. Elevated government financing costs are being transmitted to corporate loans and consumer credit, creating clear pressure ahead of the midterm elections.

Interest payments on U.S. public debt continue to be the primary driver of expanding budget deficits. To date this fiscal year, interest expenditures have reached $1.17 trillion, a 15% year-over-year increase, partly due to rising U.S. Treasury yields. The annual U.S. deficit is nearing $2 trillion, while the total national debt is approaching the $40 trillion mark.

Chris Iggo, Chief Investment Officer at AXA IM Core and currently at BNP Paribas Asset Management, said:

The November election may bring additional policy risks and keep markets highly focused on fiscal issues before the usual budget season. Ideally, no one wants to face rising mortgage rates ahead of an important election cycle, even though current rates remain below 2023 levels.

Yardeni Research’s team of strategists, led by Ed Yardeni, said on Tuesday that there is no reason to panic about the U.S. bond market: "We have not pressed the panic button, but we are closely monitoring whether bond vigilantes will."

Notably, despite inflation concerns serving as a key backdrop for this sell-off, long-term breakeven inflation rates across most major markets—indicating market expectations for future inflation—have remained relatively stable overall. The upward movement in yields has been primarily driven by real yields, the additional return investors demand above inflation compensation for holding bonds.

On the supply side, tech companies have issued large volumes of long-term bonds to finance AI investments, further exacerbating supply pressure on the long end. A recent example is Alphabet, Google’s parent company, which decided to issue A$5 billion (approximately US$3.6 billion) in bonds for the first time in the Australian bond market.

On the demand side, traditional long-term bond buyers are systematically exiting. Institutions such as pension funds have historically been a stable source of demand for long-term bonds, but this pillar of demand is weakening as defined-benefit pension plans decline and regulatory policies direct capital toward equities. Meanwhile, governments are increasing bond issuance and becoming increasingly reliant on private investors, who are more price-sensitive, to absorb the supply.

The June FOMC meeting minutes revealed that officials discussed a shift in the structure of U.S. Treasury holders—from "official sectors relatively insensitive to price" to "private investors more sensitive to price"—a transition that could push up term premiums. Anshul Pradhan, Head of U.S. Interest Rate Strategy at Barclays, noted that this change in buyer structure over the past decade has led to a roughly 90-basis-point increase in the term premium for 30-year U.S. Treasuries.

As yields continue to rise, institutional investors hold differing views on the market outlook.

J.P. Morgan Asset Management portfolio manager Kelsey Berro believes the current repricing offers a potentially attractive entry window for new capital. "We see more value on the long end, particularly in real yields," she said.

However, Iggo of AXA is more cautious:

It is difficult to determine what level of yield would be necessary to significantly improve the total return outlook for long-duration fixed-income assets. The only scenario that might change this is a sudden deterioration in economic data or some external shock—with the latter appearing more likely than the former.