High bond yields look like the new normal as debt supply rises worldwide

Government borrowing costs are rising around the world as investors demand more compensation to hold longer-maturity debt, suggesting elevated bond yields may become the new normal.

US 10-year Treasury yields reached 4.95%, while 30-year yields rose above 5% to their highest level in almost two decades. Average bond yields across the Group of Seven economies are at their highest since 2000.

Investors have pulled back from long-dated sovereign debt because of mounting fiscal deficits, persistent inflation, higher energy costs and uncertainty surrounding President Donald Trump’s trade policies. 

Technology companies are also issuing large amounts of debt to fund artificial intelligence infrastructure, competing with governments for investor demand.

Long-term government bonds are generally viewed as safe assets, but their prices are sensitive to inflation and interest rates. The longer the maturity, the more time inflation has to reduce the real value of coupon payments and principal.

The market is also undergoing a structural shift in supply and demand. Governments are spending more on defense, renewable energy and other programs while the US carries more than $40 trillion in national debt and faces an annual fiscal shortfall estimated at $2.1 trillion.

Foreign appetite has weakened, central banks are reducing bond holdings and traditional long-term buyers such as pension funds have less capacity. Private investors now make up a larger share of the market and typically demand higher compensation for holding long-term debt.

The US term premium, or the extra yield investors demand for long-term bonds, has increased by more than three percentage points from its pandemic lows, according to Bloomberg Economics. The traditional convenience yield of Treasuries has also come under pressure as debt rises.

Higher long-term yields feed into mortgages and corporate borrowing costs. Governments are responding by shifting toward shorter maturities or buying back longer-dated bonds, but those measures have not stopped yields from climbing.

Wells Fargo economists Tom Porcelli and Michael Pugliese described the environment as “normal for longer” rather than higher for longer. At current levels, the 10-year Treasury yield is only slightly above its average over the past four decades.