The global bond market is under pressure again! Investors are demanding higher risk premiums, and the yield of the issuance of 30-year German government bonds is expected to hit a 15-year high.

As investors demand higher compensation for financing a government grappling with rising debt and persistent inflation, Germany is expected to face its highest financing costs in 15 years during a large-scale long-term bond issuance. Last month, Germany issued a small amount of 30-year government bonds with a yield of 3.64%, marking the highest yield for this maturity since 2011. Insiders revealed that Germany plans to issue 30-year government bonds maturing in August 2056 through a bank syndicate, with an issuance yield expected to be 0.4 basis points higher than the current yield of 3.77% for the 30-year bonds maturing in 2054. It was added that the pricing for this 30-year bond issuance is anticipated to be announced later on Tuesday. Investors demand higher risk premiums, driving up financing costs. The costs of syndicate bond issuance are typically higher than through auctions, but this method allows the government to quickly raise large amounts of funds while broadening its investor base and achieving greater diversification. The bonds involved in this syndicate issuance were initially issued last March, with an issuance size of 6 billion euros, attracting subscription orders of 36 billion euros. In May, when the yield on this bond hovered just below a 15-year high, Germany again increased the issuance of this bond, which similarly attracted demand of 36 billion euros. Christoph Riegel, head of interest rates and credit research at Commerzbank, anticipates that the transaction on Tuesday could reach a maximum size of 3.5 billion euros (approximately 4.1 billion USD). His colleague Hauke Simson wrote in a report last month that Germany's financing needs for 2027 are expected to increase significantly. The budget draft shows that Germany's net financing needs will reach 204 billion euros. He expects that net new federal bond issuances in Germany next year will reach a record 163 billion euros, up from around 137 billion euros in 2026; at the same time, total bond issuance is expected to also reach approximately 400 billion euros, a historical high. The increase in financing needs reflects the rise in Germany's defense and infrastructure spending, while the country will face a record bond repayment pressure of 238 billion euros next year. However, not all funds must be raised through federal bond issuance. Simson stated that short-term treasury bills, cash reserves, asset sales, and funds from the state-owned development bank KfW can provide alternative sources of financing. Global bond markets face a "duration storm." As governments around the world increase spending and inflationary pressures persist following this year's oil price shock, global bond markets have generally weakened and faced further sell-offs in recent weeks. Last week, the yield on 30-year German government bonds reached a new high since 2011, while the yield on 10-year French government bonds rose to its highest level since 2009. Overnight, the 30-year U.S. Treasury bonds were subjected to ongoing sell-offs, with yields briefly climbing to 5.29%, the highest since 2007, and edging closer to the highs seen during the early stages of the global financial crisis that year. This pressure has also transmitted to Asiaon August 18, Japan's 5-year government bond yield rose to 2.18%, marking a historic high; the yield on 10-year bonds reached 2.945%, the highest level since September 1996. Although each country's bond market is influenced by local factors, the structural forces driving yields upward have a global commonality. On one hand, there are concerns that an increasingly fragmented world order will make countries' economies more susceptible to supply shocks, with inflationary pressures persisting; on the other hand, bondholders worry that governments will struggle to control fiscal expenditures, forcing interest rates to stay elevated for an extended period. In this "storm," the most notable are U.S. Treasuries. Similar to German bonds, U.S. Treasuries are facing higher financing costs due to rising risk premiums. On August 12, the 10-year U.S. Treasury bond auction saw a bid rate reach 4.683%, the highest since the 2007 financial crisis; on August 13, the U.S. Treasury completed a $25 billion auction of 30-year bonds with a winning rate of 5.216%, the highest since 2001. Behind the soaring financing costs for long bonds lies the market's growing concern over the escalating U.S. fiscal deficit. In July, the total U.S. fiscal deficit reached $432.3 billion, an increase of approximately 48% compared to the same period last year, marking the largest monthly deficit since March 2021. Worse yet, not only has the monthly deficit expanded significantly, but the cumulative fiscal shortfall in the first ten months of the fiscal year is approaching $1.8 trillion, exceeding the level for the same period in 2025. Meanwhile, the total amount of U.S. Treasury bonds has reached $39.9 trillion. In the first ten months of this fiscal year, the U.S. government paid $1.17 trillion in debt interest, up from $1.01 trillion in the same period last year, an increase of approximately $160 billion. Against the backdrop of a recent cooling of market expectations for further Federal Reserve interest rate hikes, the key reason for the continued sell-off of long U.S. Treasuries is the risk premium. Holding long U.S. Treasuries means facing fiscal supply issues, recurring inflation, and policy uncertainty, which significantly increases the compensation that investors require. Some analysts point out that the pressures of fiscal expansion and monetary policy uncertainty pose a dual constraint on long-term U.S. Treasury rates. In terms of Treasury supply, 2027 may witness a new round of long-term bond issuances. The scale of long-term Treasury bond auctions has remained unchanged since May 2024, with increased financing needs being met by short-term bonds. In 2026, U.S. fiscal financing needs may temporarily be absorbed by increasing the supply of short-term bonds. However, if the current Treasury issuance structure continues, the overall financing gap from 2027 to 2028 will expand to $1.5 trillion. On the monetary policy front, uncertainty surrounding the Federal Reserve's communication has emerged as a new factor driving up the term premium. Historically, an increase in uncertainty regarding U.S. monetary policy has typically been accompanied by a rise in term premium; even if rate hikes are priced lower due to weak employment at the short end, the uncertainty of monetary policy could maintain the long-term term premium at elevated levels. Additionally, the evolution of market structure is gradually weakening what was once stable demand from buyers. In the past, significant buyers of U.S. Treasuries included foreign central banks and the Federal Reserve, which were less sensitive to price changes. However, current demand primarily comes from funds, insurance companies, money market funds, and other value investors, who will not purchase if they feel the yield is not sufficiently high, determining that a similarly scaled fiscal deficit requires higher yields to achieve equilibrium. Outside the U.S., rising energy prices due to conflicts in the Middle East, coupled with escalating inflation concerns, are fueling market expectations for further tightening of monetary policy in multiple countries, posing a systemic threat to traditional bond markets that may even exceed the uncertainties brought about by Federal Reserve policy directions. Traders generally expect that the rise in borrowing costs in Japan, Canada, the UK, and the Eurozone over the next year will outpace that in the U.S. In Asia, Japan and South Korea are seen as the "vanguards" of this global tightening wavehigh energy costs combined with AI-driven demand for chips, electricity, and labor have directly increased upward pressure on interest rates. The European market is also struggling. Elevated energy costs and surging defense spending have cast a shadow over the European bond market. This year, benchmark yields in Germany, Italy, and France have all risen by approximately 30 basis points. This shift marks a pivot from the "Fed-centered" interest rate cycle of recent years. This situation has left investors in a dilemma. In traditional asset allocation, bonds are supposed to act as a "buffer," hedging risks when stock market rebounds falter or trade tensions hit the economy. However, if central banks outside the U.S. are forced to adopt aggressive rate hikes, bonds may fail to diversify risks and instead become a "burden" that detracts from asset portfolio performance. For fiscal authorities in various countries, the simultaneous sell-off of global long bonds is akin to a storm. From inflation risks and government debt to financing demands brought on by the AI boom, multiple factors are driving up long bond yields. Although many countries are shifting their bond issuance focus to shorter-term instruments with lower yields, they are facing a new reality where they can no longer lock in decades of financing costs at ultra-low rates; their fiscal discipline is undergoing a "trial" from the bond market.