Why Global Bond Yields Are Expected to Stay Elevated

From the US to Japan and Germany, longer-maturity bond yields have climbed to the highest levels in decades. While some of the factors driving yields higher may dissipate, Goldman Sachs Research expects the fiscal concerns pushing up interest rates to persist.

US government bonds that mature in 30 years yield about 5.2% (as of September 8), around the highest in more than two decades. Yields for similar-maturity bonds of Japan and the UK have climbed to the highest levels this century, and those of Germany have reached the highest since 2009. 

“What’s really interesting about this move higher in yields is how orderly it’s been,” George Cole, head of European rates strategy in the Global Macro and Markets Research Group, said in a webinar. “The lack of a move higher in volatility makes it hard to claim that we’re fundamentally mispriced.”

“If a view of fundamentals has carried us higher, you need a shift in fundamentals to bring us lower,” he added.

Why have longer-maturity global bond yields risen?

There are several fundamental reasons interest rates have risen around the world, according to Goldman Sachs Research. Fiscal deficits have grown substantially in many developed economies since the Covid pandemic. Borrowing to fund investment in artificial intelligence (AI) has also soared, potentially amounting to around 1% of global GDP. With the surge in government and AI-related borrowing, there’s more competition for the pool of global savings available to fund it.

At the same time, demand for bonds has diminished. Macroeconomic data has been better than expected across a range of geographies, Cole said. While recent inflation data has shown some signs of cooling, energy and food prices remain elevated.

Some of the fundamental reasons for rising bond yields could reverse in the coming quarters. Goldman Sachs Research expects worries about increasing inflation from energy prices to decline in the next six months. Cole pointed out there will be more visibility into the return on AI investment, which could relieve some of the pressure on bond markets from AI-related borrowing. “But what won’t go away is the fiscal concerns,” Cole said.

Will US Treasury buybacks reduce yields on 30-year Treasuries?

As longer-maturity bond yields rise, governments have taken steps to adjust their issuance of longer-dated securities. Notably, the US Treasury said last month that it would increase its buybacks of Treasuries that mature in 10 years or more. Doing so will reduce the maturity-profile of US debt stock, and shorter-maturity issuance will be used to finance the buybacks.

“It’s an effective reduction in the average maturity of issuance,” Cole said. “That in and of itself isn’t sufficient to change the yield level.”

He points out that other governments, including the UK and Japan, have also sought to reduce their issuance of longer-maturity borrowing.

Adjusting issuance across the spectrum of bond maturities is a natural supply response to shifting patterns of demand, Cole and William Marshall, head of US rates strategy, write in a report. “However, we see little evidence that these issuance responses can meaningfully impact the broader level of yields—even at the long end.”

“It’s not a criticism to say that this isn’t going to change the macro price of yields,” Cole said in the webinar. “Those types of measures are perfectly consistent with the macro environment we’re in. At these levels of long-end yields, there just isn’t demand for that level of duration. There’s less interest in these long-end securities, so don’t issue them.”

What is the outlook for the global yield curve?

Goldman Sachs Research expects the global yield curve to remain steep—longer-maturity bond yields are predicted to stay relatively high compared to yields of shorter-maturity notes. The term premium that investors demand for the risk of holding longer-maturity assets is also forecast to remain higher, Cole and Marshall write.

“Energy volatility continues to drive day-to-day yield moves and challenge the usefulness of bonds as a portfolio hedge,” they write. “We think this steepening will remain a feature of the rates environment as the inflationary and fiscal drivers of higher term premium remain persistent.”

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