(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.
The US’s funding challenges came into focus after Moody’s Ratings (MCO) stripped the nation of its last top-tier credit score a week ago. That downgrade was followed by the US House of Representatives passing a multi-trillion dollar bill that extends President Donald Trump’s tax cuts, and weak demand for an auction of 20-year Treasuries.
“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 (^TYX) 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, with Bank of America Corp’s (BAC) Michael Hartnett saying 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. The 30-year yield traded just above 5% as of 11 a.m. in London, up for a fourth week.
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.
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.
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
JGBs Still Lacking Relative Value Amid Yield Curve Surge
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.
Strategists are widely discussing the broad implications of Japan’s bond rout for US Treasuries. Deutsche Bank AG (DB) warned 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.
