The relentless rise in long-term government borrowing costs shows no sign of abating, and the list of aggravators is growing by the day. If you’ve been in thrall to gravity-defying stock markets this year, look no further to see where stress is building in world markets.
Debt, oil, inflation and interest-rate risks are combining with domestic political and geopolitical uncertainty, and with ebbing official and private-sector demand for long bonds, to push borrowing costs in the Group of Seven (G7) advanced economies on aggregate to the highest in more than 20 years.
The implied yield on buckets of G7 government debt with maturities of 10 years or more has risen above 4.6 per cent this week for the first time since 2004, according to ICE Bank of America indexes. And this is just the latest installment in a post-pandemic storm that ended decades of ever-cheaper government borrowing costs, with headwinds seemingly growing stronger.
In dollar terms, the Bloomberg long-term G7 bond investment index has now almost halved in price from its record peak 10 years ago, and it’s still falling.
As 30-year U.S. Treasury borrowing costs topped 5 per cent again this week and stalked their highest in almost two decades, Britain’s 30-year gilt yields hit their highest since the 1990s, and Japan’s equivalents are once again on the cusp of record highs.
The Iran war and its related energy shock put an end to some stabilization early in the year. Tuesday’s news of another surge in U.S. inflation, to its highest in almost three years in April, underscores its impact. And after 11 weeks of the war, hopes for a peace agreement have been dashed again, and year-end crude futures are climbing toward US$100 per barrel.
Making up almost 50 per cent of total G7 government debt, U.S. Treasuries are the elephant in the room despite a litany of domestic worries across the rich-country grouping.
As of Tuesday, futures had wiped out any expectation of further Federal Reserve interest rate cuts this year, with inflation now expected to exceed 4 per cent in May - more than twice the central bank’s target. Markets are now almost 80 per cent priced for the next Fed rate move to be up as soon as next April.
That’s despite the expected arrival as Fed Chair later this week of President Donald Trump appointee Kevin Warsh.
Whatever Warsh’s take on interest rates turns out to be, his view on cutting the Fed’s US$6.7-trillion balance sheet of bonds is yet another reason for the long end to shiver. More than a third of the debt on the Fed’s books is in bonds with maturities of 10 years or more.
But flip to Japan, whose government debt is more than a fifth of the G7 total, and the picture for long-term debt there is worse.
A return of long-absent inflation, normalization of Bank of Japan interest rates after decades near zero and yet another round of government stimulus spending from newly installed Prime Minister Sanae Takaichi have sent long-dated borrowing costs soaring. Thirty-year yields have now more than doubled in two years.
A running battle to stabilize the ailing yen merely goads the BoJ to tighten sooner rather than later, while aging demographics are eroding appetite for super-long debt among Japan’s once reliable long-bond lovers - its life insurers and pension funds.
In the euro zone, the energy shock has arguably been more acute than anywhere else, and markets are pricing European Central Bank rate rises as soon as next month.
But that just heaps pressure on worrisome domestic debt dynamics, as French 30-year debt costs hover near their highest in 17 years amid repeated political and budget tensions. Even in Germany, 30-year bund yields have hit 15-year highs after its sudden defense-related spending spree.
Bank of England interest-rate rises are also on the radar to rattle the UK gilt market.
But even that may have been tolerable if it wasn’t for Prime Minister Keir Starmer’s dire predicament this week.
A possible leadership challenge from the left wing of his ruling Labour Party jarred the long end of the bond market - not unlike Japan’s leadership change did last year - amid concern about a subsequent loosening of UK budget purse strings.
To top off the debt and rates picture in Europe, there’s been a structural demand shift away from super-long duration bonds in recent years. Dutch pension funds are now legally able to invest more beyond that sector, and British defined-benefit pension funds have also retreated since the budget and bond shock of 2022.
Back stateside, the headlong dash by so-called hyper-scaler tech firms to plow hundreds of billions of dollars into the artificial intelligence datacenter boom is also prompting substantial bond sales to help fund it, often in multiple currencies and at super-long maturities.
Competition for governments raising long-bond finance is clearly rising too.
Yet markets are still far from treating this as a crisis.
Front-loading national debts into shorter maturities may be one unavoidable consequence. But without a reduction in overall debt piles, that only intensifies refinancing pressures, rollover risks and potential volatility for sovereign borrowers.
Some argue government bond woes are part of the reason savers and investors see little alternative to high-flying stocks. But a deepening crunch in bellwether government borrowing markets, which form the basis of global finance, would be impossible to ignore for any investor - or the wider economy.