Summary of Key Points
Recently, the yield on 30-year U.S. Treasury bonds has continuously exceeded 5%, setting a new record for the longest consecutive period and the highest proportion of trading days since 2007. The real yield, after adjusting for inflation, has also reached its highest level since the financial crisis in 2008. This trend is driven by investors' concerns about the deterioration of the U.S. fiscal situation (a growing debt burden and interest payments exceeding one trillion dollars), as well as persistent inflation. Additionally, there is competition for investor funds between AI-related financing activities and government bonds, which has even led to speculation about the resurgence of a phenomenon known as the "bond vigilantes." This trend not only raises the cost of borrowing for the entire society but also impacts long-term assets such as technology stocks. In the future, yields above 5% may become the new norm.
1. 30-Year U.S. Treasuries: The Record-Breaking “5% Era” Has Arrived
This year, the yield on 30-year Treasury bonds has remained above 5% for 27 days (accounting for 19% of the total trading days), with 12 consecutive days exceeding 5%, the longest period since 2007. More importantly, the real yield (after inflation adjustment) is close to 3%, the highest it has been since 2008. Although the Federal Reserve's benchmark interest rate is currently 150 basis points lower than in 2007, investors are demanding higher returns, indicating greater concern about the risks associated with holding the longest-term U.S. government bonds (such as the possibility of the government defaulting on its debts or inflation eroding bond returns).
2. Two Major Drivers of Rising Yields: Deteriorating Fiscal Conditions + AI-Funded Competition for Funds
- Deteriorating Fiscal Situation: The size of U.S. national debt has expanded from $4.5 trillion in 2007 to $31 trillion, with the debt-to-GDP ratio exceeding 100%, and annual interest payments surpassing one trillion dollars. Fitch Ratings has warned that the U.S. debt burden is much higher than that of other countries with an AA rating, raising concerns among investors about the government's long-term ability to repay its debts.
- AI-Funded Competition for Funds: Technology companies have issued more than $500 billion in bonds to fund their AI infrastructure, competing with government bonds for investor capital. Traditional buyers (such as pension funds and insurance companies) now have more options and are less inclined to rush to buy long-term bonds at yields of 5%. As a result, the government must offer higher yields to sell its debt.
3. Could the “Bond Vigilantes” Return?
The term "bond vigilantes" refers to investors who drive up bond yields by selling government bonds in order to force the government to cut spending and control deficits. This concern is resurfacing:
- Hoisington, a firm that had been bullish on long-term bonds, has reversed its position this month, citing fiscal deficits and AI-related financing as factors contributing to rising inflation and yields.
- Institutional investor Hank Smith warned, “When debt becomes a real problem, the bond market will signal it.” Although there have been no issues with U.S. bond auctions so far, any financial turmoil could affect everyone in the market.
4. Impacts Beyond the Bond Market: Mortgage Rates and Technology Stocks Are Also Affected
- Rising Borrowing Costs: The yield on U.S. Treasuries serves as a benchmark for borrowing rates across the economy. Higher yields on 30-year bonds will lead to higher mortgage and corporate bond rates, making it more expensive for individuals to buy homes and for businesses to raise capital.
- Impact on Technology Stocks: Leading technology companies, which often do not pay high dividends but rely on future profits to attract investors, have a similar "duration" (the time required to recoup their investment) as 30-year Treasuries. If U.S. bond yields remain high, investors may prefer government bonds due to their perceived safety and higher returns, leading to declines in technology stock prices.
- Impact on 10-Year Treasuries: 10-year Treasuries are considered a global benchmark for asset pricing. If their yield exceeds the recent high of 4.687%, it could trigger further market turmoil, similar to what happened in October 2023 when a 10-year Treasury yield of 5% caused significant stock market declines.
5. The Future: A “5% Era” May Become the New Norm
Wall Street institutions generally expect the U.S. Treasury Department to increase the auction volume of 2- and 30-year bonds by 2027, further increasing the supply of long-term debt. Coupled with unresolved fiscal deficits and ongoing competition for funds from AI-related financing activities, investors' concerns about long-term risks will not dissipate. A manager at Vanguard Investments noted that while yields of 5% used to be eagerly sought after, traditional buyers now have more options, suggesting that yields above 5% may become the new norm.
In summary, the rise in the yield on 30-year U.S. Treasuries is not an isolated event; it reflects the combined effects of fiscal policies, technological developments, and market sentiment. This trend could have a lasting impact on the global economy and asset prices. Individuals should be prepared for higher mortgage rates and greater volatility in technology stocks, while the resolution of the government's debt issues remains uncertain.