Inflation stickiness, AI debt, and fiscal disorder are entangling multiple factors, resulting in the 30-year U.S. Treasury yield reaching a new high since 2007, while the global bond market faces a "duration storm."

Long-duration bonds are becoming the epicenter of investor anxiety concerns over the inflation outlook, the heavy debt burden from the AI boom, and other issues are all converging here, and governments around the world are paying the price for it. Globally, sovereign borrowing costs have skyrocketed across the board. This week, the yield on the 30-year U.S. Treasury rose to a new high since 2007, the borrowing costs in France hit a peak not seen since 2008, and the yields on similar German bonds returned to 2011 levels. The yield on long-term UK government bonds is approaching 6%, and Japanese bonds of comparable maturity are nearing historical highs. Despite the local factors affecting markets in various countries, the structural forces pushing yields higher are universally applicable. On the one hand, there are worries that a fracturing global order will leave economies more vulnerable to supply shocks, perpetuating inflationary pressures. On the other hand, bondholders are concerned that governments will struggle to rein in fiscal spending, which would stimulate the economy and force interest rates to remain high for an extended period. Meanwhile, the evolution of market structure alongside demographic changes is gradually weakening what was once stable buyer demand. This represents a storm for finance ministers around the world. Many countries are shifting their bond issuance focus to shorter-term instruments with lower yields. However, faced with a new reality where ultra-low rates can no longer secure decades of financing costs, the maneuvering space for fiscal authorities is ultimately limited. Chris Iggo, Chief Investment Officer of AXA IM Core, a subsidiary of BNP Paribas Asset Management, stated, It's hard to tell how high yields would need to go to improve the overall return outlook for long-duration fixed-income products. The only thing that could change this situation is a sudden weakening of economic data or some external shock, the latter of which seems more likely. This year, soaring energy prices triggered by conflicts in the Middle East have severely impacted the global bond market and fueled bets that the Federal Reserve and other central banks will tighten monetary policy further. However, the challenges faced by fixed-income investors began well before the outbreak of conflict, and recent price movements indicate that other factors are driving long-term yields higher. Since late June, the yield on the 30-year U.S. Treasury has increased by nearly 40 basis points, hitting 5.32% on Tuesday, the highest level since mid-2007. This poses a tricky problem for both Trump, facing midterm elections, and Treasury Secretary Yellen, as high government financing costs are translating into corporate loans and consumer credit costs. Iggo from AXA noted, The elections in November could bring more policy risk, and will undoubtedly shift market attention towards fiscal matters ahead of the regular budget season. Ideally, no one wants to face rising mortgage rates during an important election period even though current rates are still below 2023 levels. The U.S. Treasury market is just one part of the broader picture. Data compilation shows that the average yield on investment-grade government bonds has surged to nearly 4.5%, the highest level recorded since 2015. Another layer of pressure on global long-term government bonds comes from competition with corporate borrowers. Bond issuance is progressing at a record pace, injecting a substantial amount of duration supply into the U.S. fixed-income market, particularly from technology companies raising funds for AI investments, which tend to seek longer-term financing. These American companies are increasingly tapping into overseas bond markets; for example, Alphabet Inc. (GOOGL.US) has chosen to launch an AUD-denominated bond in Australia, amounting to 5 billion Australian dollars (about 3.6 billion U.S. dollars). As supply surges, the buyer structure is simultaneously evolving. Traditionally, many bond markets have relied on institutional demand for long-term assets from pension funds to match their liabilities. However, an increasing number of pension plans are exiting the fixed-income system, and regulatory policies are encouraging funds to allocate more to equities. Looking more broadly, as government bond issuance increases, countries are relying more on private investors. The minutes from the Federal Reserve's June policy meeting revealed that officials noted the ownership structure of Treasuries is shifting from price-insensitive official sector holders to more price-sensitive private investors, a transition that could impact the term premium the extra yield that investors require for holding long-duration bonds. Anshul Pradhan, Head of U.S. Rates Strategy at Barclays PLC Sponsored ADR, stated, Official demand is primarily driven by policy objectives, while private investors are more sensitive to returns. He pointed out that this change in the buyer structure over the past decade has contributed about 90 basis points to the term premium on U.S. 30-year Treasuries. In Japan, while absolute yield levels remain lower than in other major economies, the recent upward trend has been persistent. Japan's relatively steep yield curve reflects market speculation that the Bank of Japan is too slow in raising rates to combat inflation. Additionally, the central bank's decision to reduce its bond-buying program, combined with concerns about increased government spending and high energy costs, adds further pressure. Prashant Newnaha, Senior Rates Strategist at TD Securities for the Asia-Pacific region, noted, The outlook for rising imported energy inflation and the tightening pressure on the Bank of Japan are virtually unable to provide the market with a catalyst to buy Japanese bonds. Japan should be the 'ballast' for global rates, yet the risk of rising Japanese bond yields is enhancing the possibility of a repricing of global durations. Despite concerns about price pressures driving much of the current bond sell-off, long-term breakeven inflation rates or market expectations for future inflation remain relatively stable across most major markets. In reality, what is pushing borrowing costs higher is the so-called real yield, the extra return that investors require for holding bonds beyond inflation compensation. Kelsey Berro, a portfolio manager at J.P. Morgan Asset Management, believes this repricing process may present attractive entry points for new funds. We believe value is accumulating, and we are relatively optimistic about long-duration products, particularly regarding real yields. We genuinely believe that if risk assets experience more pronounced volatility, the eventual correlation between asset classes will provide support for the portfolio, she stated.