Long-term government bonds punished those who held them for much of this year, but now, with yields high enough, investors are beginning to return.
After a sustained sell-off this year, global long-term government bonds are once again attracting institutional investors. As yields rise to multi-decade highs, more asset management firms are beginning to believe that the potential returns on long-term bonds are sufficient to offset some of the interest rate and fiscal risks.
The U.S. 10-year Treasury yield approached 5.4% this month, reaching its highest level since 2002, while Japan’s 10-year Treasury yield hit 3.14%, its highest in about 30 years. Higher yields are attracting investors who previously reduced their holdings of long-term bonds to re-enter the market.
The market rebound is already evident. According to Bloomberg data, the return on the global government bond index with maturities over 10 years reached 2.2% in October, significantly outperforming government bonds with maturities of 1 to 3 years, which showed nearly flat performance. This marks the first time since February this year that long-term government bonds have outperformed short-term government bonds on a monthly basis.
Long-term bond valuation attractiveness has increased, and institutional buying has reappeared.
Recently, institutions such as JPMorgan Asset Management, Aegon Asset Management, Ninety One, and Allianz Global Investors have refocused on long-term government bonds.
Bob Michele, Global Head of Fixed Income at J.P. Morgan Asset Management, said that long-term bonds had previously become too cheap, with yields significantly deviating from fair levels. He has recently increased his holdings of long-term government bonds in the United States, Australia, and Japan.
Rising yields have increased the potential holding returns of bonds in the future, while recent volatility in technology stocks has prompted some capital to shift toward government bonds.
As investors reassess the return prospects of massive capital expenditures by artificial intelligence companies, high-valued stocks face increased scrutiny. Fund flow data shows that the iShares U.S. Treasury ETF has seen inflows for a second consecutive month, while the iShares Core S&P 500 ETF has shifted from prior net inflows to net outflows.
Safe-haven demand further propelled the recent rise in bond prices. On Friday, amid selling pressure on U.S. tech stocks, U.S. Treasury yields declined by at least 4 basis points across the curve, while the 10-year yields for Australia and New Zealand each fell by more than 5 basis points. The U.S. 10-year Treasury yield dropped approximately 37 basis points in October, marking the largest monthly decline since December 2023.
Long-term government bonds in Japan and the UK have rebounded, with supply and demand conditions showing improvement.
The return of buying demand for long-term bonds is not limited to the United States. Japanese government bonds had previously been pressured by expectations of fiscal expansion, expectations of Bank of Japan rate hikes, and insufficient demand from traditional buyers, but after yields rose to historical highs, foreign institutional investors have begun increasing their allocations again.
Prudential Group, Allianz Global Investors, and BNP Paribas Asset Management have recently increased their focus on or holdings of Japanese medium- to long-term government bonds. The yield on Japan’s 30-year government bonds has declined by nearly 40 basis points from this month’s high of 4.25%.
According to data from the Japan Securities Dealers Association, Japanese life insurance institutions have been net buyers of ultra-long-term government bonds for four consecutive months, and foreign investors have also been net buyers for three consecutive months.
UK long-term gilts have also benefited from supply adjustments. The UK Debt Management Office stated on Wednesday that the proportion of gilts issued with maturities over 15 years this fiscal year is expected to fall below 7%, the lowest level since the 1990–91 fiscal year.
This arrangement continues the UK government’s trend of reducing the issuance of long-term, high-cost debt. Following the announcement, yields on UK 20-year and 30-year government bonds fell to around a one-month low.
Over the past few months, Royal London Asset Management has shifted to an overweight position on UK 30-year gilts. Craig Inches, Head of Rates and Cash at the firm, believes that with yields continuing to rise, the time has come to extend the duration of bond portfolios.
Inflation and fiscal pressures remain unresolved, and the sustainability of the rebound is still under debate.
Although long-term government bond prices have rebounded, the core risks that triggered the previous sell-off have not disappeared.
Rising energy prices, monetary tightening by major central banks, and deteriorating government fiscal conditions may still require investors to demand higher risk compensation for holding long-term bonds.
The Federal Reserve held rates steady this week but raised its assessment of U.S. economic growth. Chair Powell did not commit to a specific future rate path, leaving investors divided on whether the Fed needs to implement more aggressive tightening measures.
In Europe, ongoing political and fiscal instability in France continues to impact the government bond market. After the European Central Bank held interest rates steady this Thursday, investor expectations regarding potential ECB intervention to curb French bond sell-offs were affected, causing prices of some European long-term government bonds to fall again.
U.S. fiscal policy remains a key focus for the future. As long-term U.S. Treasury yields have declined from their highs, the financing pressure on the U.S. Treasury has eased. Although markets previously speculated that the Treasury might reduce issuance of 20-year and 30-year bonds, several banks expect that even if adjustments are made, they may not be implemented until 2027.
The U.S. midterm elections on November 3 increased policy uncertainty. A divided Congress could limit further fiscal expansion; if the Republican Party unexpectedly retains control of both chambers, markets may reassess future spending and inflation risks.
Hilary Winn, Investment Director at AJ Bell, believes that the current performance of long-term bonds is better viewed as a temporary respite rather than a reversal of the trend. The firm still favors bonds with higher credit quality and shorter maturities.
Oliver Faizallah, Head of Fixed Income Research at Raymond James Wealth Management, also noted that economic slowdown and flight-to-safety buying may continue to suppress yields, but fiscal policy easing or escalation of conflict leading to a resurgence in inflation could trigger another sell-off in long-term Treasuries.