Global Long-Term Bonds Collapse as Low-Interest Era Comes to an End

Author: Claude, Deep潮 TechFlow

Shenchao Overview: Long-term government bonds in developed countries are collectively losing ground, as markets are no longer repricing isolated fiscal surprises but rather confronting the reality of persistently high debt, large deficits, and elevated interest rates. As debt growth continues to outpace economic growth, energy shocks reignite inflation, and central banks' room for rate cuts shrinks, the low-rate refinancing model that supported developed economies' financing for over a decade is beginning to crack.

Over the past week, the UK 30-year government bond yield rose to 5.82%, the highest since 1998; Japan’s 30-year bond yield reached 4%, the highest since its inception in 1999; the U.S. 30-year Treasury yield surpassed 5% for the first time since 2007; and France’s 10-year bond yield climbed above 3.8%, returning to levels not seen since 2007. This sell-off has weighed on global stock markets, and G7 finance ministers will specifically address this bond selloff at their meeting this week.

According to Ajay Rajadhyaksha of Barclays’ Fixed Income, FX & Commodities Research in a report dated May 18: “Long-term bonds weren’t just sold off last week—they’ve broken out of their ranges everywhere.” The core assessment is that debt is growing faster than economic growth, the inflation outlook has worsened, and there is insufficient political will for fiscal reform; even after the decline in long bonds, there is still no compelling reason to extend duration.

JPMorgan Chase Asset Management portfolio manager Priya Misra issued a similar warning: "Long-term interest rates are rising in sync globally, often reinforcing each other, and expectations of Fed rate hikes are increasingly entering market narratives."

A decline in a single country's bond market is typically attributable to domestic inflation, fiscal policy, political factors, or central bank communication. However, the simultaneous breakdown in bond markets across the UK, Japan, the US, and France suggests that markets are now pricing in risks beyond local factors.

The commonality is clear: debt levels in major advanced economies are generally above 100% of GDP, and fiscal deficits are not being covered by nominal growth. The U.S. deficit is approximately $2 trillion, equivalent to 6.5% of GDP, with nominal growth around 4.5% to 5%; France’s nominal GDP growth year-over-year through the quarter ending March 2026 was 2.2%, with a deficit of about 5%; the UK’s deficit exceeds 4%.

This is precisely the core contradiction pointed to by a "fiscal Ponzi scheme": the government continuously relies on new debt and refinancing to sustain spending, but the pace of debt expansion outstrips economic growth, and interest costs have once again become more expensive. As long as this dynamic remains unchanged, long-term bonds will require higher yields to attract buyers.

New spending continues to add pressure. Last year, NATO agreed in The Hague to raise its defense spending target to 5% of GDP by 2035; European defense spending already saw double-digit percentage growth last year and may continue for a decade; the U.S. government has requested $1.5 trillion in defense funding for the next fiscal year from Congress. These expenditures are not offset by corresponding cuts.

Debt and deficits were already fragile, and energy price shocks have further constrained policy space. The blockade of the Strait of Hormuz was the direct trigger for this wave of bond market turmoil; as this critical global oil transit route was disrupted, oil prices continued to rise, reigniting inflation expectations.

Barclays' baseline assumption is that the average Brent crude oil price in 2026 will reach $100, a 50% increase from the 2025 average. This would directly worsen inflation prospects, reduce room for central banks to cut interest rates, and could even force them to raise rates. Higher interest rates mean continued upward pressure on interest expenditures for existing debt, and rising interest costs make it harder to reduce deficits. This resembles a fiscal ratchet: each step forward reduces the government’s policy flexibility and increases the compensation demanded by bond investors.

JPMorgan Chase Managing Director Priya Misra stated directly: "Unless the strait reopens, interest rate ranges have shifted higher overall."

Looking at the short-end data, the U.S. 2-year yield rose as high as 4.09%, the highest since February 2025; the 10-year yield stood at 4.58%, near its highest level in a year; overall, U.S. Treasuries have posted negative returns year-to-date, compared with a peak intra-year gain of nearly 2% at the end of February.

Karen Manna, Fixed Income Strategist and Portfolio Manager at Federated Hermes, said: “We are seeing a world that is truly addressing a new round of inflation.”

Kevin Flanagan, Head of Investment Strategy at WisdomTree, expects the next Consumer Price Index report to show annual inflation reaching 4%, the highest level since 2023. He directly pointed to market logic: “The inflation narrative is dominating the market, with the bond market demanding higher risk premiums to hold newly issued Treasuries.”

Last week’s Treasury auction validated this pricing: the 30-year auction yield reached 5%, the highest since 2007, but demand was tepid; investor demand for the 3-year and 10-year auctions was similarly muted. Even though long-term yields have risen to their highest levels this year, this alone is not sufficient justification to buy duration.

The inflation storm is reshaping expectations for the Fed’s policy path. The environment facing incoming Fed Chair Kevin Warsh is far from the “easy path” markets envisioned at the beginning of the year.

Traders currently view a rate hike in March next year as highly likely, with a roughly three-in-four chance of a hike by December; at the end of February this year, the market anticipated two rate cuts in 2026. U.S. Treasury yields have risen by approximately 50 basis points or more since the end of February.

Official statements have further reinforced hawkish pricing. Last week, Chicago Fed President Austan Goolsbee indicated that broad-based price pressures could even signal an overheating economy; Fed Governor Michael Barr described inflation as the “overwhelming” risk to the economy. This Wednesday, the Fed’s April meeting minutes will be released, and markets will closely monitor how much support dissenting voices have gained among policymakers.

The latest J.P. Morgan U.S. Treasury investor survey shows that short positions in Treasuries have risen to their highest level in 13 weeks, indicating a clear increase in market bets on further declines in the bond market.

Japan's 30-year government bond yield has reached 4%, which is not extreme by U.S. or U.K. standards, but holds different significance for Japan. For the past 20 years, Japan's long-term interest rates have been near zero, and the balance sheets of pension funds, insurance companies, and regional banks were structured around this environment.

Japan's policy interest rate is currently 0.75%. At the April meeting, three of nine committee members opposed the current stance; market pricing implies a 77% probability of a rate hike in June. Even if the Bank of Japan raises rates to 1%, real interest rates will still be significantly negative.

The rise in Japan’s long-term yields can be interpreted as monetary policy normalization: the end of deflation, rising real wages, and the economy returning to a more normal state. However, the issue is that in an economy with debt exceeding twice its GDP, interest rate normalization may not be gentle. A 4% yield on 30-year Japanese government bonds is not merely a change in yield numbers—it represents a repricing of the entire low-interest-rate financial system.

The UK Labour government holds a working majority of over 150 seats in a 650-seat parliament, theoretically giving it the capacity for fiscal adjustments. However, last summer, a proposed saving of £1.4 billion on winter fuel subsidies triggered backlash from Labour’s parliamentary party.

Political pressure continues to mount. Ninety-seven Labour MPs have called on the prime minister to resign or provide a timeline for departure; main challenger Andy Burnham previously argued that fiscal policy should not bow to bond markets, later clarifying that he would not entirely ignore investors. Over the past four years, the UK has had four prime ministers and five chancellors. Bond market pricing suggests the Bank of England still has over 60 basis points of rate hike room left by year-end, although Governor Bailey may prefer to wait and see.

France’s issues are less prominent than those of UK government debt, but its fiscal structure is equally challenging. France has had five prime ministers in less than three years. The current government has survived two no-confidence votes in its effort to pass a budget targeting a deficit of 5% of GDP. Reforms that raised the retirement age to 64 in 2023 are under attack, even though 64 remains below that of most Western economies. France’s deficit is already significantly higher than nominal GDP growth, voters are likely to strongly punish any austerity efforts, and constitutional arrangements make it easier for parliament to block spending cuts. Everyone knows the deficit must fall, but no one is willing to bear the political cost of making it happen.

The yield on U.S. 30-year Treasury bonds rose above 5% for the first time since 2007. The immediate causes are rising inflation, fiscal expansion, and high deficits—but these are not new. The deeper change is that marginal buyers are shifting.

The U.S. federal deficit is approximately $2 trillion. The Congressional Budget Office projects that federal debt held by the public as a share of GDP will rise from its current level above 100% to 120% by 2036. However, these projections may still be overly optimistic. One key variable is tariff revenue: the effective U.S. tariff rate has fallen from a peak of 12% to 7–8%, below the CBO’s assumption of 15%. Even if it eventually rises to 10%, tariff revenue over the next decade will amount to only about 60% of the $3 trillion in deficit reduction assumed by the CBO. Assumptions regarding defense spending and interest costs may also be too low.

The U.S. dollar’s status as the global reserve currency remains a structural advantage, enabling the U.S. to finance itself at interest rates unattainable by other debt-heavy nations. However, this does not mean a 6.5% deficit rate is sustainable. Central banks were once stable buyers of long-duration assets, but following the Western freeze of Russia’s foreign reserves, central bank allocations have shifted toward gold. Last year, gold’s share in central bank reserves surpassed that of U.S. Treasuries. Japan, the largest holder of U.S. Treasuries, now finds its domestic market yields more attractive. The Federal Reserve remains in the process of balance sheet reduction. The buyers of long-term bonds are now private investors, who are more price-sensitive and demand higher term premiums.

Over the past few years, debt management authorities have relatively reduced long-term bond issuance and may continue to adjust the issuance structure in the future; however, this can only alleviate supply pressure, not alter the trajectory of fiscal policy or inflation.

Some in the market are debating whether the Fed will be forced to restart large-scale asset purchases to prevent long-term interest rates from rising further. However, Warsh previously stated that the Fed’s balance sheet “can be significantly reduced,” which is not indicative of preparations to implement a yield curve control policy akin to Japan’s.

Amid ongoing selling pressure, some investors have chosen to hold their positions. Kevin Flanagan, an analyst at WisdomTree, stated that currently maintaining exposure to floating-rate notes and keeping interest rate sensitivity low is prudent, saying, “It’s better to buy late than early.” He views the 10-year yield level of 4.5% as “more of a psychological barrier,” and if escalating tensions in the Middle East push oil prices higher, yields could retest last year’s high of 4.62%. Hank Smith, Head of Investment Strategy at Haverford Trust, holds a more cautious view, noting that it remains unresolved whether increases in consumer and producer prices are temporary—or will persist through 2027.

The forces driving the sell-off—fiscal deterioration, rising defense spending, persistent inflation, and constrained central banks—will not disappear within one or two weeks. Unless economic data shows a clear weakening or there is a credible shift in the fiscal path, long-term government bonds in developed markets continue to be priced around one core issue: the low-interest-rate financing model of the high-debt era is being repriced by the market.