"Bond Market Storm" Sweeps the US, Europe, and Japan, Long-term Bond Yields Approach Decades-high Levels

The global sovereign bond market is experiencing the most severe wave of sell-offs in decades. Under the triple pressures of inflation concerns, fiscal expansion, and structurally shrinking demand, long-term yields continue to climb, leading to a sudden rise in government financing costs worldwide.

This week, the yield on the US 30-year Treasury bond touched 5.33%, the highest level since 2007; the yield on the equivalent French government bond rose to its peak since 2008; the yield on the German 30-year bond returned to 2011 levels; the UK’s 30-year gilt yield is nearing 6%; and Japan’s 30-year government bond yield has climbed to its highest since 1999.

According to an article by Wallstreet News, the composite yield of global government debt has returned to 2007 levels. In addition, Bloomberg data shows that the average yield on investment-grade sovereign bond benchmark portfolios has surged to around 4.5%, the highest since records began in 2015.

This round of sell-offs is not an isolated event in a single market, but is driven by global structural forces—persistent geopolitical turmoil has intensified supply shocks and inflation risks, governments’ fiscal discipline is loosening, and the demand from traditional long-term bond buyers is shrinking systemically. Analysis points out that this means the pricing logic of long-term fixed income assets is being rewritten; for the Trump administration, elevated financing costs have already become a political pressure point ahead of the midterm elections.

US Treasury Yields Under Full Pressure, Long End Bears the Brunt

The epicenter of this bond market storm is at the long end. Since the end of June, the yield on the US 30-year Treasury bond has risen by nearly 40 basis points, hitting 5.33% intraday on Tuesday before settling back slightly to 5.28%, but still hovering near a two-decade high.

Long-term bonds are leading the decline because they are more sensitive to risks such as inflation. Justin Onuekwusi, Chief Investment Officer at St. James's Place, stated:

"The market is sending the signal that we expect higher future inflation, or at least greater uncertainty, so we demand higher yields for holding long-term bonds."

Bloomberg macro strategist Skylar Montgomery Koning points out that there is a key difference in this structural upward movement in yields: fiscal deficits are expanding without a significant weakening in the economy.

"Typically, a larger deficit is accompanied by a weakening economy, with policy rates falling and providing a buffer for the bond market. However, current pro-cyclical fiscal expansion means governments are borrowing even more at already high rates, pushing yields higher."

Europe and Japan Under Pressure, Many Countries Face Decade-High Financing Costs

Europe's bond market is also not immune. The yield on France’s 30-year government bond rose to its highest since 2008 as investors focus on the uncertainty around the 2027 budget negotiations and next year’s presidential election.

According to Bloomberg, sources revealed that Germany issued a 30-year bond via syndication on Tuesday, paying the highest rate in 15 years.

As for Japan, although absolute yield levels are still lower than in other major markets, the upward momentum in the 30-year government bond yield is similarly strong, now at its highest since 1999.

Facing a sharp surge in long-term financing costs, some countries have begun adjusting their bond issuance strategies, turning to shorter-dated bonds.

UK authorities have suspended most of their scheduled long-term bond issues. However, governments’ room for maneuver is very limited—in a new environment where it’s no longer possible to lock in decades of financing at ultra-low rates, policy options are much narrower.

For the Trump administration, the ongoing rise in long-term yields is not merely a market issue but also a political one. The high cost of government financing is being transmitted to corporate loans and consumer credit, creating significant pressure ahead of the midterm elections.

Interest payments on US public debt continue to be the core driver of an expanding budget deficit. So far this fiscal year, interest expenses have totaled $1.17 trillion, a 15% increase year-on-year, partly due to higher Treasury yields. The US annual deficit is approaching $2 trillion, and total national debt is nearing the $40 trillion mark.

Chris Iggo, Chief Investment Officer at AXA IM Core and now at BNP Paribas Asset Management, stated:

"The November elections may bring more policy risks and will keep the market highly focused on fiscal issues ahead of the usual budgeting season. Ideally, no one wants to face rising mortgage rates on the eve of a key election cycle, even if current rates remain below 2023 levels."

The strategist team at Yardeni Research, led by Ed Yardeni, stated on Tuesday that there’s no reason to panic about the US bond market yet: "We haven’t hit the panic button, but we are closely watching to see whether the bond vigilantes will."

Dual Supply-Demand Imbalance: Real Yields as Main Driver

Notably, although inflation concerns are an important backdrop for this selloff, long-term breakeven inflation rates in most major markets—the market’s indicator of future inflation expectations—have remained relatively stable. The yield rise is primarily driven by an increase in real yields, meaning investors are demanding additional returns over inflation compensation.

On the supply side, technology firms are issuing large amounts of long-term bonds to finance AI investments, further increasing long-end supply pressure. Alphabet, Google’s parent company, recently decided to issue A$5 billion (about $3.6 billion) worth of bonds in the Australian market for the first time, as a case in point.

On the demand side, traditional long-term bond buyers are systematically exiting. Institutions such as pensions have been a stable source of long-term demand, but as defined benefit pension plans dwindle and regulatory policies steer funds more towards equities, this support is weakening. Meanwhile, governments are expanding bond issuance and becoming increasingly dependent on more price-sensitive private investors.

Minutes from the Federal Reserve’s June meeting show officials have discussed changes in the structure of Treasury holders—the main holders are shifting from "official sectors relatively insensitive to price" to "private investors who are more price-sensitive." This shift could elevate term premiums. Anshul Pradhan, Head of US Rates Strategy at Barclays, said that this buyer structure shift over the past decade has led to an approximately 90 basis point rise in the term premium for 30-year US Treasuries.

Facing the persistent yield climb, institutional investors are divided about the outlook.

Kelsey Berro, portfolio manager at J.P. Morgan Asset Management, believes the current repricing presents a potentially attractive entry point for new money. “We think most value is found at the long end, especially in real yields,” she said.

However, AXA’s Iggo is more cautious:

"It's hard to determine at what yield level the total return outlook for long-duration fixed income assets will truly improve. The only thing likely to change this landscape would be a sudden deterioration in economic data or some kind of external shock—of which the latter seems more likely."