Global bond slump pushes 30-year yields to 5.32%, highest since 2007

Long-term sovereign borrowing costs have surged to multi-decade highs, with 30-year US Treasury yields touching 5.32 percent — the highest since 2007 — as investors demand greater compensation for inflation and fiscal risk.

"US bonds now have to compete with debt from other developed markets like Japan, and buyers are concerned about the health of these markets, requiring a higher yield incentive to hold long-duration paper," said Ira Jersey, chief US interest rate strategist at Bloomberg Intelligence.

The move extends well beyond the US. French 30-year borrowing costs hit their highest since 2008, German peers traded at 2011 levels, UK gilt yields approached 6 percent, and Japanese bonds neared all-time highs. The average yield on a benchmark portfolio of investment-grade government bonds has climbed to almost 4.5 percent, the highest in data compiled by Bloomberg going back to 2015. US 30-year yields have risen almost 40 basis points since the end of June.

The surge threatens to feed through to mortgage rates — already at 6.75 percent for a 30-year fixed loan — and corporate borrowing costs, potentially dampening economic growth. With US midterm elections approaching in November, elevated government financing costs could become a political flashpoint.

The structural forces driving yields higher are global in nature. One factor is competition from corporate borrowers: a record pace of bond issuance has added substantial duration supply to US fixed-income markets, particularly as technology firms finance artificial-intelligence investment at longer maturities. Alphabet Inc. recently marketed a debut A$5 billion Australian dollar debt issue, one example of US firms tapping overseas markets.

The supply challenge coincides with a shift in the buyer base. Fed minutes from the June policy meeting noted that Treasury ownership was moving from "relatively price-insensitive official-sector holders to more price-sensitive private investors." Barclays' head of US rates strategy, Anshul Pradhan, estimates this change in buyers over the last decade accounts for about 90 basis points of the term premium on 30-year US Treasuries.

In Japan, yields remain below global peers but their rise has been relentless. The steepening yield curve reflects speculation that the Bank of Japan has been too slow to raise rates to tame inflation, alongside the central bank's decision to wind down its bond-buying program. "Japan was meant to be the anchor for global rates, and the risk that JGB yields move higher raises the risk that global duration reprices," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

Real yields drive the move as inflation expectations stay anchored

While concern over price pressure has driven much of the bond selloff, long-dated break-even rates — which measure market expectations for future inflation — have remained relatively well anchored in most major markets. Instead, the rise in borrowing costs has been driven by real yields, the extra compensation investors demand on top of inflation to hold bonds.

US inflation ran at 3.4 percent in July as measured by the consumer price index, far above the Federal Reserve's 2 percent target and up from 2.4 percent in January before the Iran conflict began. The 10-year Treasury yield — a key benchmark for fixed mortgage rates — sits above 4.7 percent, compared with below 4 percent before the war.

Consumer borrowing costs follow yields higher

The transmission to household borrowing costs is direct. The average 30-year fixed mortgage rate stood at 6.75 percent as of Tuesday, up from 6.69 percent the prior week. Auto loan rates are already near 7 percent for new vehicles and 10.6 percent for used ones, according to Edmunds data. Credit card rates, closely pegged to the prime rate, face renewed upward pressure.

"It typically is an immediate pass-through to some consumer rates," said Brett House, an economics professor at Columbia Business School. "Variable and some fixed-rate borrowing will reset rates on a daily basis."

Some strategists see opportunity in the repricing. "Where we have seen more value created and that we like a little bit better would be the long end, particularly in real yields," said Kelsey Berro, a portfolio manager at JPMorgan Asset Management.

"It is hard to know what level of yield would make the outlook for total returns from long duration fixed income better," said Chris Iggo, chief investment officer at AXA IM Core at BNP Paribas Asset Management. "The only thing which might change that is a sudden weakening in economic data or some kind of external shock."

This article is for informational purposes only and does not constitute investment advice.