Global Long Term Bond Yields Rise on Fiscal Policy Concerns

Long-term borrowing costs are climbing across major global economies, from the United States to Japan, as investors grow increasingly skeptical about governments' ability to manage rising budget deficits. In recent trading, 30-year U.S. Treasury yields crossed the 5% mark, nearing levels last seen in 2007. Japan, on the other hand, saw its long-term yields hit record highs dating back to when official data began in 1999.

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The weak demand at recent bond auctions in both countries highlights growing investor caution. Similarly, long-dated bonds in other developed economies—including the United Kingdom, Germany, and Australia—have also experienced increased selling pressure.

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The shift comes as investors warn that governments can no longer rely on borrowing freely as they did during the near-zero interest rate era. Persistent inflation and heightened geopolitical tensions have significantly reduced the likelihood that central banks will return to ultra-loose monetary policies. Additionally, the withdrawal of key players like central banks and pension funds from the bond market has removed a critical source of consistent demand.

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“It’s not surprising that investors are hesitant to support what they see as unsustainable deficit levels in major economies,” said Kathleen Brooks, research director at XTB Ltd. She noted that in comparison, high-grade corporate bonds are now more attractive options.

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The current environment has drawn comparisons to past instances when bond investors, often dubbed "bond vigilantes," pressured governments into scaling back spending. Notable examples include the United States in the early 1990s, the eurozone debt crisis during the 2010s, and the UK market turmoil in 2022. Just last month, even former President Donald Trump acknowledged bond market concerns, which contributed to him softening his stance on proposed tariffs.

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The ramifications of rising yields extend beyond the bond market. A sudden spike in the U.S. 30-year Treasury yield this past Wednesday triggered a broad market selloff, pushing the S&P 500 Index down by 1.6%, marking its steepest decline in a month.

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Elevated borrowing costs also affect businesses and households. Higher interest rates translate to more expensive loans, limiting the ability to borrow or spend, and in turn, weakening economic activity. This creates a vicious cycle in which governments face ballooning deficits due to shrinking tax revenues. It may force central banks to reconsider their focus, potentially shifting from prioritizing inflation control to supporting growth.

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In Washington, the world's largest borrower is coming under renewed scrutiny. Lawmakers continue to propose further unfunded tax cuts even after Moody’s removed the U.S. government’s final triple-A credit rating. The total value of outstanding U.S. Treasury debt has surged from $4.5 trillion in 2007 to nearly $30 trillion today.

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According to the Congressional Budget Office, the debt-to-GDP ratio has also soared from about 35% to 100% over the same period.

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Investors now demand a higher risk premium for holding long-dated U.S. debt, reflecting growing concerns over the country’s fiscal trajectory. These worries are also weighing on the U.S. dollar, which has not benefited from rising yields as it typically would.

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In Japan, the selloff in long-term government bonds has been especially severe. The Bank of Japan is gradually cutting back its bond-buying efforts amid rising inflation. However, key traditional buyers like life insurance firms are not stepping in to fill the void.

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Prime Minister Shigeru Ishiba recently expressed alarm over the country’s financial position, stating it was worse than that of Greece. “The supply-demand imbalance has already been disrupted, and because this is a structural issue, I don’t think it will be easily resolved,” said Mari Iwashita, executive rates strategist at Nomura Securities. Without action from Japan’s Ministry of Finance, she warned, market instability is likely to persist.

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Japan’s rising bond yields may also affect U.S. Treasuries, as they make domestic bonds more attractive to Japanese investors. Deutsche Bank’s George Saravelos described the growing gap between U.S. yields and the Japanese yen as a key sign of increasing U.S. fiscal risk.

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There are, however, isolated pockets of strong demand. For example, the UK successfully issued £4 billion ($5.4 billion) in 30-year bonds this week, drawing £73 billion in orders at a yield of roughly 5.40%.

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Nonetheless, the UK’s Debt Management Office has already taken steps to respond to the shifting landscape by reducing its reliance on long-dated debt, particularly as pension funds—once a major source of demand—cut back. Analysts at Bank of America predict other countries may follow suit by shortening the maturity of their new debt to attract buyers.

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Germany has also seen a rise in yields, partly driven by a multibillion-euro spending initiative focused on defense and infrastructure. Its 30-year bond yield is currently around 3.16%, close to a recent peak of 3.25%. Pressure on German bonds is expected to intensify as the government increases issuance to fund these investments. Additionally, upcoming pension reforms in the Netherlands will remove a historically reliable source of demand starting in 2026.

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Although Germany maintains a reputation for fiscal prudence and has room to boost borrowing, it will face stiff competition in the global bond market from other nations also ramping up long-term debt issuance. “There’s clearly a lack of demand for long end duration everywhere,” said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management in London.

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