Are 2007-level bond yields here to stay?

The return of sovereign bond yields to 2007 levels could be here to stay as investors continue to shun longer-dated paper amid stubborn fiscal deficits and sticky inflation, compounded by a Big Tech borrowing boom crowding the market, according to Bloomberg. The average yield on sovereign debt globally has now hit 4%, a level last seen in 2007.

A worldwide issue: Last month the yield on the 30-year US Treasury reached its highest level since 2007, before a continued sell-off then pushed borrowing costs for the same dated debt to peaks not seen since the middle of 2004. The 10-year Treasury has also broken above 5%, its highest in almost two decades, even after Treasury Secretary Scott Bessent expanded buybacks of long-dated debt in August to cool what he called a “fever” in the market. The first tranche came in smaller than expected. Elsewhere, Japan’s 10-year yield crossed 3% for the first time since 1996 earlier this month, and UK 10-year gilts hit their highest level since mid-2007.

Why the safe haven has lost its shine: Long-dated bonds are the most exposed to inflation and rising rates, since both eat into the real value of coupons and principal over a longer stretch of time. That risk is now live: the Fed raised rates this month for the first time in three years, and a majority of FOMC members projected another hike this year. As a result, the term premium investors demand to hold 30-year US debt is up more than 3 percentage points from its 2020 low, according to a Bloomberg Economics model.

More supply, fewer buyers: Governments are borrowing more to fund everything from defense to the energy transition. The US alone carries over USD 40 tn in debt, and the CBO expects its annual deficit to reach USD 2.1 tn. At the same time, central banks are shrinking their bond holdings, foreign appetite has weakened, and changes to pension systems have thinned the pool of traditional long-term buyers. The debt is increasingly held by more price-sensitive private investors, who want to be paid more to lock their money up for decades.

Big Tech is crowding in too: Governments are also competing with hyperscalers borrowing to fund the AI buildout. Notable transactions this year include USD 37 bn from Amazon and USD 25 bn from Meta. JPMorgan estimated in June that AI-linked debt financing could reach USD 4.1 tn by 2030, with some USD 2.1 tn in data center financing coming from high-grade bonds.

The playbook — and its risks: Many debt offices are tilting issuance toward shorter maturities where yields are lower. The OECD flagged this trend earlier this year, warning that many countries are rebalancing their issuance toward shorter maturities to limit exposure to higher long-term borrowing costs, although this increases refinancing risks. The lasting fix is convincing investors that inflation and deficits are under control, which likely means unpopular tax hikes or spending cuts.

What it means for the Gulf: Gulf borrowers are being squeezed from two sides. Regional USD bonds and sukuk are priced as a spread over US Treasuries, so when Treasury yields climb, Gulf debt gets more expensive too — and those spreads have widened since the war started as well. Abu Dhabi’s 10-year yield rose to around 5.2% by late August from roughly 4.5% in January, while UAE corporate spreads were wider than at the war’s March peak. That makes the Gulf an outlier, as EM debt has otherwise held up well during the selloff. Saudi paper faces an extra supply problem of its own, with heavy issuance from the government, Aramco, and PIF weighing on its long-dated bonds. Some analysts think the problem is mostly geopolitical risk, while Franklin Templeton’s Mohieddine Kronfol says it’s largely a Treasury story.

Not all bad news: Savers benefit, and some analysts argue the moves reflect a resilient economy returning to pre-crisis norms, after the financial crisis pushed yields to near zero. As Wells Fargo economists put it, the better description is “normal for longer.”

MARKETS THIS MORNING-

Asian markets were in the red in early trading, with Japan’s Nikkei down 0.9% and South Korea’s Kospi down 0.8%. The performance tracked overnight losses seen across Wall Street and led by Nasdaq.

THE CLOSING BELL: TADAWUL-

The TASI fell 1.0% yesterday on turnover of SAR 3.5 bn. The index is up 0.8% YTD.

In the green: Al Kathiri Holding (+6.5%), Salama Cooperative Insurance (+6.3%), and Alramz Real Estate (+3.8%).

In the red: Saudi Fisheries Company (-7.9%), Rasan Information Technology (-5.4%), and Arabian Company for Agricultural and Industrial Investment (-5.2%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.4% yesterday on turnover of SAR 9.1 mn. The index is down 7.9% YTD.

In the green: Itmam Consultancy (+8.0%), Knowledge Tower (+6.3%), and Mobi Industrial (+5.6%).

In the red: National Building and Marketing Company (-10.8%), Taqat (-10.4%), and Naf Company for Feed for Industry (-9.4%).

CORPORATE ACTIONS-

Tabuk Agriculture shareholders approved an 80.5% capital cut. The company will reduce capital to SAR 76.5 mn from SAR 391.8 mn by canceling 31.5 mn shares — one for every 1.24 held — to restructure its capital and write off accumulated losses, Argaam reported, citing a Tadawul filing. Trading was suspended for two sessions from yesterday and resumes at the close today.

Cenomi Centers’ shareholders have approved an 8.98% capital increase, looking to boost capital to SAR 5.2 bn from SAR 4.8 bn through 39.6 mn bonus shares and 3.1 mn shares for a planned employee share program, per a Tadawul filing. The bonus issue, one share for every 12 held, makes up 8.33% of the increase, with the employee program making up the remaining 0.65%.

Al Kathiri Holding has filed to cut its capital by 91.46%. The company asked the Capital Market Authority to approve a reduction to SAR 9.7 mn from SAR 113 mn, canceling 206.7 mn shares to restructure its capital and write off accumulated losses. It still needs regulatory and shareholder approval.