Another evidence of global bond market under pressure! Investors demand higher risk premiums, Germany's 30-year government bond issuance yield expected to hit 15-year high

According to Zhitong Finance APP, as investors demand higher compensation for providing financing to governments with ever-increasing debt and still grappling with inflation, Germany is expected to face its highest funding costs in 15 years in a large-scale long-term bond issuance.

Last month, Germany issued a small batch of 30-year government bonds at a yield of 3.64%, the highest yield for bonds of this maturity since 2011. According to sources, this time Germany will issue 30-year government bonds maturing in August 2056 through a bank syndicate, and the yield for this issuance will be 0.4 basis points higher than the yield of the 30-year bond maturing in 2054 (currently at 3.77%). The sources added that pricing for this 30-year bond is expected to be announced later on Tuesday.

Investors Demand Higher Risk Premium, Driving Up Financing Costs

The cost of syndicated bond issuance is generally higher than auction-based issuance, but this method allows the government to raise large amounts of funds quickly, expand the investor base, and diversify the investor structure. The bonds involved in this syndicate issuance were first issued in March last year with a scale of €6 billion, attracting €36 billion in subscription orders. In May, when the bond yield hovered just below a 15-year high, Germany tapped the bonds again, also attracting €36 billion in demand.

Christoph Rieger, Head of Rates and Credit Research at Commerzbank, expects the transaction size on Tuesday could reach as high as €3.5 billion (approx. $4.1 billion). His colleague Hauke Siemssen wrote in a report last month that Germany’s funding needs for 2027 are expected to rise significantly, with the budget draft showing a net funding requirement of €204 billion for Germany. He expects net new issuance of federal bonds to reach a record €163 billion in Germany next year, up from around €137 billion in 2026. Meanwhile, total bond issuance is also expected to reach a historic high of about €400 billion.

Rising funding needs reflect increased spending on defense and infrastructure in Germany, and the country faces a record €238 billion in bond redemptions next year. However, not all funds must be raised through federal bond issuance. Siemssen noted that short-term Treasury bills, cash reserves, asset sales, and capital from Germany’s state-owned KfW development bank can all provide alternative sources of financing.

Global Bond Markets Face a "Duration Storm"

As governments worldwide ramp up spending and inflationary pressures persist following this year’s spike in oil prices, the global bond market has broadly weakened, with further sell-offs in recent weeks. Last week, the yield on Germany’s 30-year bonds hit a new high since 2011, while the 10-year French government bond yield rose to its highest since 2009. Overnight, 30-year US Treasuries continued to be sold off, and yields temporarily hit 5.29%, the highest since 2007 and further approaching peaks seen in the early days of the global financial crisis. This pressure has also spread to Asia—on August 18, the yield on Japanese 5-year bonds climbed to 2.18%, a record high; the 10-year yield rose to 2.945%, the highest since September 1996.

Although each country’s bond market is influenced by domestic factors, the structural drivers pushing yields higher are global in nature. On one hand, markets are concerned that an increasingly fragmented world order will make economies more vulnerable to supply shocks and persistent inflationary pressures; on the other hand, bondholders worry that governments everywhere will struggle to contain fiscal spending, keeping interest rates elevated for longer periods.

The most high-profile case in this "storm" is US Treasuries. Like German bonds, US Treasuries are facing higher financing costs due to increased risk premiums. On August 12, the cutoff rate for the $42 billion US 10-year Treasury auction reached 4.683%, the highest since the 2007 global financial crisis. On August 13, the US Treasury auctioned $25 billion of 30-year bonds at a yield of 5.216%, the highest since 2001.

Soaring long-term funding costs are rooted in mounting market concerns over the United States’ fiscal deficit. In July, the US fiscal deficit reached $432.3 billion, up about 48% year-on-year, the largest monthly deficit since March 2021. Worse yet, not only did the single-month deficit expand sharply, but the cumulative fiscal shortfall for the first 10 months of the current fiscal year has approached $1.8 trillion, surpassing the level for the same period in 2025.

Meanwhile, the total size of US debt has reached $39.9 trillion. In the first ten months of this fiscal year, the US government paid $1.17 trillion in interest on the debt, up from $1.01 trillion the previous year, an increase of about $160 billion.

Against this backdrop of cooling expectations for Fed rate hikes, the key reason for the ongoing sell-off in long-term US Treasuries is rising risk premiums. Holding long-term Treasuries means having to face fiscal supply, recurring inflation and policy uncertainty; hence, investors are demanding noticeably higher compensation.

Some analysis points out that fiscal expansion pressure and monetary policy uncertainty form a dual constraint on US long-term rates. On the supply side, another round of long-term Treasury issuances may come in 2027. Since May 2024, the scale of long-term Treasury auctions has remained unchanged, with incremental funding needs met by short-term Treasuries. US financing requirements for 2026 can, for now, be digested through increased short-term issuance. However, if the current issuance structure persists, the general funding gap could widen to $1.5 trillion in 2027 and 2028.

On the monetary policy side, uncertainty in Fed policy communication has become a new factor pushing up term premiums. Historically, increased uncertainty in US monetary policy has usually coincided with higher term premiums; even when short-term rate hike pricing falls back due to weak employment, the uncertainty in policy can still keep long-end term premiums elevated.

Additionally, the evolving market structure is weakening what were once stable sources of demand. Major buyers of US Treasuries used to be foreign central banks and the Fed, who were less price-sensitive. But now, incremental demand comes mainly from funds, insurance companies, and money market funds—value-driven investors who will not buy unless yields are high enough. This means the same scale of fiscal deficits requires higher yields to clear the market.

Outside the US, with Middle East conflicts pushing up energy prices and intensifying inflation worries, expectations of tighter monetary policy in multiple countries continue to rise—a systemic threat to traditional bond markets that may now overshadow the uncertainty brought by Fed policy. Traders generally anticipate that Japan, Canada, the UK, and the Eurozone will see borrowing costs rise faster than the US over the next year.

In Asia, Japan and South Korea are considered “front runners” in the current wave of global tightening—high energy costs combined with AI-driven chip, electricity, and labor demand are directly pushing up pressure on interest rates. Europe is equally affected. Persistently high energy costs and surging defense expenditure are casting a shadow over European bond markets. Since the beginning of this year, benchmark yields in Germany, Italy, and France have all increased by about 30 basis points.

This shift marks a deviation from the “Fed-centric” rate cycle of the past few years. This situation leaves investors in a dilemma. Traditionally, bonds are supposed to act as a “shock absorber” in asset allocation, hedging risks when equities falter or trade disputes impact the economy. However, if central banks outside the US are forced into aggressive rate hikes, bonds may not only fail to diversify risk, but could even become a “burden” dragging down portfolio performance.

For fiscal authorities worldwide, the synchronized sell-off of long-term bonds is nothing short of a storm. From inflation risks and government debt to the AI boom driving increased financing needs, multiple factors are pushing up long-term bond yields. Although many countries are shifting their focus toward issuing shorter-term bonds with lower yields, facing a new reality where ultra-low borrowing costs can no longer be locked in for decades, their fiscal discipline is coming under a new "trial" from the bond market.