The global bond market is experiencing a significant shift, with average yields on government debt reaching a 19-year high. This volatility is attributed to a combination of factors including persistent inflation, ongoing geopolitical conflicts like the Iran war, massive national debts (the US debt surpassed $40 trillion), and increasing competition from AI-related corporate bond offerings. The Federal Reserve's recent interest rate hike and projections for further increases also contribute to the upward pressure on yields.
The US Treasury bond market, one of the largest globally with $1.2 trillion traded daily, is particularly affected. The 30-year Treasury yield recently hit a two-decade high, and the 10-year Treasury yield soared past 5% this week, marking its highest level in nearly two decades. This environment has prompted firms to shy away from long-dated bond offerings due to rising costs, and major investors, such as Norway's sovereign wealth fund, are planning to significantly reduce their holdings of US government bonds, with plans to cut by $80 billion from its $215 billion position.
Despite the challenges, some analysts, like Christian Mueller-Glissman from Goldman Sachs, suggest that while caution is warranted, the sharp rise in yields could increase the appeal of bonds within multi-asset portfolios. However, the rising costs of government debt are stark; the US now spends over $1 trillion annually on interest payments, exceeding its military budget since 2024. Treasury Secretary Scott Bessent's efforts to calm the market, such as tripling long-term bond buybacks to $6 billion, are seen as too small to have a lasting impact by experts like Carsten Roemheld of Fidelity International.
The growth of AI-related corporate bonds, with four major "hyperscalers" raising over $800 billion in debt this year, is also creating competition for government debt. Investors are finding alternatives in high-quality corporate bonds offering attractive spreads over Treasuries. While the US still dominates capital markets and economists believe investors will not entirely abandon US debt as long as the economy grows, the increasing debt burden and higher interest rates signal the end of the era of cheap government borrowing.
