Government borrowing costs globally are on the rise as investors seek greater compensation for holding longer-maturity debt. In the US, this trend led to 10-year Treasury yields surpassing 5%, reaching their highest level in nearly two decades, despite efforts by Treasury Secretary Scott Bessent to expand buybacks of long-dated government debt. This increase in yields is not unique to the US, as similar pressures are observed in other G7 nations like the UK, Japan, Germany, and France, leading to concerns about fiscal sustainability becoming a near-term risk.
Several factors contribute to investors' retreat from long-dated sovereign debt. These include expanding fiscal deficits, persistent inflation exacerbated by President Donald Trump's trade war, and higher energy costs stemming from the Middle East conflict. Additionally, governments face increased competition for investor capital, as technology companies are issuing substantial amounts of debt to finance the development of artificial intelligence infrastructure. This heavy government and corporate borrowing, coupled with reduced demand from traditional bond buyers, is considered a structural factor contributing to elevated yields.
Analysis indicates that over 70% of the increase in 10-year Treasury yields since late February has been driven by higher expected real short-term rates and an increased real term premium, rather than a significant re-evaluation of inflation. The real yield on 10-year Treasury Inflation-Protected Securities (TIPS) is now around 2.5%, the highest since 2007. While Treasury supply is a long-term fiscal concern, recent auction data do not suggest a sudden drop in demand is the primary cause of the current yield surge. The competition for capital from AI-related corporate borrowing, which accounts for approximately 24% of dollar investment-grade supply this year compared to about 6% in the euro area, is also elevating term premia and making nominal Treasuries and TIPS more attractive.
