Summary of Key Points
Global sovereign long-term bonds, especially those with a 30-year maturity, are experiencing the most severe selling pressure in decades, with yields reaching their highest levels since 2007-2011. The reasons behind this include a triple threat: an explosion in supply (government debt issuance and AI financing by tech companies), shrinking demand (due to the withdrawal of traditional buyers), and inflation combined with fiscal expansion. Goldman Sachs warns that there is too much bond supply, and the Federal Reserve may be forced to raise interest rates even as the economy weakens, in order to curb long-term interest rates. This not only increases the financing costs for governments around the world but also poses political pressure on Trump ahead of his midterms, while ordinary people will feel the impact of higher loan rates (for mortgages and business loans).
Why Are Long-Term Bond Yields Rising So Drastically? — Higher Risks Require Higher Interest Rates
Long-term bonds (such as 30-year Treasuries) are essentially "long-term loans." Lending $100 to the government for 30 years naturally comes with a higher interest rate because the longer the period, the greater the risk of inflation eroding the value of the money and the risk that the government may not be able to repay it.
The surge in long-term bond yields signals two main things to the market:
1. Uncertain Inflation Expectations: Although inflation is not as high as it used to be, there are concerns that it could rise in the future (for example, due to geopolitical conflicts driving up energy prices), leading investors to demand more "inflation compensation" in the form of higher interest rates.
2. Severe Imbalance between Supply and Demand: Governments are issuing a large amount of debt (the U.S. deficit is approaching $2 trillion, and European countries are also expanding their fiscal spending), while tech companies are aggressively issuing long-term bonds for AI investments (AI-related debt has reached nearly $500 billion this year, far exceeding expectations). At the same time, traditional buyers of long-term bonds (such as pension funds) are pulling out because regulations are encouraging them to invest more in stocks or because their fixed-income portfolios are being reduced.
In simple terms, there are more sellers than buyers, so interest rates have to rise to attract buyers.
Why Might the Federal Reserve Raise Rates Against the Economic Cycle? — Supply Pressure Overcomes Economic Data
Under normal circumstances, the Federal Reserve would lower interest rates to stimulate the economy when it is weak. However, this time is different:
Goldman Sachs believes that the rise in long-term bond yields is not due to a strong economy but rather an excess of supply. Short-term interest rates (such as those for 1-year bonds) may fall due to economic weakness, but long-term rates (for 30-year bonds) continue to rise because of excessive debt issuance, causing the yield curve to become steeper (with long-term rates much higher than short-term rates).
If the yield curve becomes too steep, it will be extremely costly for governments to issue long-term debt. For example, the U.S. already spends $1.17 trillion annually on interest payments, and further increases could lead to a huge deficit. Therefore, the Federal Reserve may be forced to raise rates (even if economic data is poor) in order to flatten the curve, either by lowering long-term rates or by raising short-term rates, thereby narrowing the gap between them and making it more feasible for governments to finance their operations.
The Whole World Is Affected: Financing Costs Reach Multi-Year Highs
This is not a problem unique to the U.S.; major economies around the world are under pressure:
- Europe: French 30-year bond yields have reached their highest levels since 2008 due to lax fiscal discipline ahead of the 2027 elections. Germany is paying the highest interest rates on 30-year bonds in 15 years.
- Japan: 30-year bond yields have reached their highest levels since 1999, as the country tries to balance growth, stabilize the currency, and expand its fiscal budget, but these goals are becoming increasingly contradictory (for example, expanding the budget requires more debt issuance, which in turn drives up interest rates and causes the currency to weaken).
- UK: The UK has essentially halted most long-term bond issuances because bonds are not selling.
Governments have few options: they can either issue shorter-term bonds (but with the risk of having to refinance them later at higher costs) or endure higher interest rates. In short, the good times of borrowing at extremely low interest rates are over.
The Impact on Politics and Ordinary People
1. Political Implications: High financing costs will affect Trump's midterms as they will be reflected in higher mortgage rates (which are linked to long-term bond yields) and increased business loan costs, potentially leading to voter dissatisfaction.
2. For Ordinary People: If you want to buy a house, mortgage rates will rise (for example, 30-year mortgage rates in the U.S. are already接近 8%). Businesses may face difficulties in obtaining loans, which could result in layoffs or wage freezes. Increased government interest payments will reduce funds available for education and healthcare, affecting people's daily lives.
What Will Happen in the Future?
There are divided opinions among institutions about the market outlook:
- Optimists: JPMorgan Chase believes that current high long-term bond yields present a good opportunity to buy at bargain prices since the actual returns are already quite high.
- Cautions: AXA Asset Management suggests that it's hard to predict exactly how high yields will go, unless there is a sudden economic downturn or an external shock (such as a worsening geopolitical conflict), in which case long-term rates may continue to be under pressure.
In summary, as long as governments and tech companies continue to issue large amounts of debt and traditional buyers do not return, long-term bond yields are likely to remain high. Ordinary people should prepare for higher borrowing costs, while the next move by the Federal Reserve will be a focal point for the market.
(The entire text is explained in plain language to ensure that non-financial readers can understand it.)