Why high bond yields look like the new normal
Investors’ retreat from long-dated government debt is due to concerns including mounting fiscal deficits
High bond yields are now considered the new normal due to a variety of concerns driving investors away from long-dated government debt. Fiscal deficits, persistent inflation, trade tensions, and competition from technology companies have all contributed to the shift. US bond yields have climbed, with 10-year Treasuries surpassing 5% and reaching their highest levels in almost two decades.
This development prompted Treasury Secretary Scott Bessent to announce expanded buybacks of long-dated government debt, an intervention that failed to halt the yield surge. Globally, the average sovereign debt yield has reached 4%, the highest level since 2007. The strong demand for longer-maturity debt comes amidst mounting fiscal deficits and higher energy costs, as well as fierce competition among governments for investor attention.
The bond market has witnessed a structural shift in supply and demand, with global savings now chasing a limited supply of safe assets, suppressing long-term real yields. However, investors face risks, as inflation and rising short-term interest rates erode the real value of bond coupon payments and principal repayment. Longer-dated bonds have been particularly sensitive to these factors.
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