US 30-year Treasury yields climbed to 5.32% on Tuesday, their highest level since mid-2007, as a global selloff pushed long-dated government borrowing costs sharply higher. The move, which amounts to almost 40 basis points since the end of June, has taken long-duration debt into territory that investors have not seen in years.
The rise is being watched now because it is not just a US story. French borrowing costs hit their loftiest level since 2008 this week, German long-term borrowing costs traded at 2011 levels, UK equivalent gilt yields approached 6%, and similar-maturity Japanese yields moved close to their all-time high. For anyone trying to price mortgages, corporate loans or public debt, that is the same message in four different markets: the cost of money at the long end is moving up together.
Chris Iggo of AXA IM Core said it is hard to know what level of yield would improve total returns from long-duration fixed income, and he argued that the only thing likely to change that would be a sudden weakening in economic data or some kind of external shock. He added that the second possibility looks more likely than the first. That matters because the current climb in yields is happening without that kind of break in the economic backdrop, which leaves investors with a market that is already repricing risk before any obvious trigger appears.
The pressure is being reinforced by a record pace of bond issuance, which has added substantial duration supply to US fixed-income markets. At the same time, governments are shifting more of their debt sales toward shorter tenors where yields are lower, a sign that the long end has become the harder place to borrow. data compiled since 2015 shows the average yield on a benchmark portfolio of investment-grade government bonds has surged to almost 4.5%, underscoring how broad the move has become.
The friction point is that demand is being tested from more than one side. Corporate borrowers are competing for the same pool of money, while governments are still facing fiscal concerns and market scrutiny. November's elections could add another layer of policy risk and will focus attention on fiscal matters ahead of the usual budget season. If that attention meets a bond market already unsettled by inflation worries, spending concerns and heavy supply, the long end may stay under pressure until something bigger changes the tone.
For now, the clearest reading is that the re-pricing in long-duration debt has gone further than many expected and may continue to feed through to borrowing costs well beyond sovereign markets. Until economic data weakens enough to shift expectations, or an external shock forces a reset, investors are being asked to live with higher yields rather than wait for relief.
