(Bloomberg) — Bond investors are demanding more and more compensation to hold long-dated US debt as global markets grow anxious about the widening fiscal deficit in the world’s biggest economy.
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The US 10-year term premium — or the extra return investors demand to own longer-term debt instead of a series of shorter ones — has climbed to near 1%, a level last seen in 2014. It’s a measure of how jittery investors are about plans to raise the scale of future borrowing.
While bonds pared some of their weekly losses on Friday, investors were still clearly focused on the US’s funding challenges after Moody’s Ratings stripped the nation of its last top-tier credit score. This week, the US House of Representatives passed a multi-trillion dollar bill extending Trump’s tax cuts, and an auction of 20-year Treasuries attracted weak demand.
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“The danger for now is that this fiscal phenomenon feeds on itself,” said Ella Hoxha, head of fixed income at Newton Investment Management, in an interview with Bloomberg TV. “That should be somewhat of a concern, certainly for risky assets and certainly for policymakers as well, as they have to finance at much higher interest rates.”
US long-term borrowing costs surged this week, with the 30-year yield climbing to 5.15% — just shy of its highest level in nearly 20 years. The real rate for the same tenor — which is adjusted for inflation — closed at the most elevated level since 2008 on Wednesday.
The moves eased on Friday as the selloff attracted buyers and President Donald Trump threatened a sweeping tariffs on the European Union and Apple Inc. The 30-year yield traded just above 5% as of 2:45 p.m. in London, up for a fourth week.
Bank of America Corp.’s Michael Hartnett said investors should take the opportunity to add long-dated Treasuries as the US government is likely to heed warnings from bond vigilantes to bring its debt under control.
Others were more circumspect, pointing to periods where term premium in 10-year notes was far higher than it is now. In the first decade of this century, it averaged a level of more than 150 basis points, according to the New York Fed’s gauge, before plunging in the years of ultra-easy monetary policy.
Investors are realizing that long-dated debt “is no longer a safe asset,” said Guillermo Felices, global investment strategist at PGIM Fixed Income. He adds it’s “very hard” to assess the fair value of these notes because the term premium had been “distorted” for years.
Long-term bond yields have also risen elsewhere this week, with those in Japan climbing to the highest since records began in the late 1990s. Similar debt in the UK, Germany and Australia has also faced selling pressure.
It’s a reminder from markets that governments can’t keep borrowing at the pace they did when interest rates were close to zero, particularly since trade tensions and sticky inflation have diminished the probability that policymakers will dramatically ease monetary policy.
“This speaks to the ongoing degree of nervousness around the fiscal backdrop in the US, but also on a global level, where deficit concerns continue to play on the minds of market participants everywhere,” said Michael Brown, a strategist at Pepperstone. “Justifiably so, frankly, given that there seems little-to-no desire among governments to get a grip of the situation.”
Investors around the globe have been moving away from US assets since Trump unveiled high tariffs on trading partners. While some of those have since been scaled back, fund managers say there’s too much policy uncertainty.
“We have moved from the tariff story to the fiscal story,” Citigroup Inc. strategists including Dirk Willer wrote in a note, recommending clients to be underweight duration. “While the recent steepening of curves has been a global phenomenon, driven by a shortage of savings, the ‘Big Beautiful Bill’ risks adding fuel to the fire.”
Money managers from DoubleLine to PGIM have flagged the risk that long-term yields will keep rising, and even central banks have expressed their worries. On Friday, the governor of the Philippine central bank said the authority may consider reducing its holdings of US debt following the Moody’s downgrade.
Japan’s Case
Japanese bond markets were particularly hit by the latest selloff. That’s the result of the Bank of Japan scaling back its bond purchases as inflation accelerates, at the same time that traditional buyers like the nation’s life insurers fail to fill the gap left behind. Prime Minister Shigeru Ishiba said this week the nation’s financial conditions are worse than Greece’s.
What Bloomberg’s Strategists Say…
“Today’s hot inflation data out of Japan reinforces the view that stagflation risks are building and that is especially painful for holders of long-term debt. …It could be some time before investors are convinced there is clear relative value in the Japanese curve.”
— Mark Cranfield, Markets Live Strategist, Singapore
Barclays Plc’s global chair of research Ajay Rajadhyaksha said Japan may consider asking government-owned entities to support the nation’s bond market if the selloff in longer-dated debt doesn’t abate. While this isn’t his base case and may not progress beyond an idea, in theory such a scenario could trigger sales of US Treasuries in order to pay for domestic bonds.
The Japanese 30-year bond staged a comeback on Friday as the selloff lured buyers, leading the yield to fall 13 basis points to 3.05%. Still, strategists are widely discussing the broad implications of Japan’s bond rout for Treasuries, with Deutsche Bank AG warning the rising Japanese yields will make the notes more attractive to local buyers and so pose a threat to US debt.
Albert Edwards, a global strategist at Societe Generale SA, said that while US bond and stock markets have previously benefited from money flowing from Japan, this may now be reversing.
“I would rank trying to understand and follow the surging long end of the JGB market as the No. 1 most important thing for investors at the moment,” Edwards wrote in a report to clients.
–With assistance from James Hirai and Naomi Tajitsu.
(Updates with latest market moves in third paragraph, refreshes prices throughout.)
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