Long-dated yields surge, complicating fiscal and monetary policy

Governments around the world are having an increasingly hard time selling long-term sovereign-issued bonds, the Financial Times reports. Recently, a US government issuance fell flat, while Japanese sovereign prices dipped as yields rose, with investor appetite waning just as governments ramp up issuance to fund persistent fiscal deficits.

A global “mismatch” between supply and demand is at the heart of the issue, a T Rowe Price portfolio specialist told the Financial Times. The governments are issuing more debt — often with longer maturity dates — and central banks are selling off their bond holdings just as appetite from traditional buyers like pension funds and insurers starts to dampen.

This combination is pushing long-yields toward multi-decade highs, with refinancing and borrowing costs rising along with them, throwing the question of debt sustainability to the forefront of political and fiscal debate, rather than inflation or economic growth.

“The bond market has never been more powerful, because we’ve never had so much debt,” economist Ed Yardeni told the Financial Times. Across the OECD, debt costs are now at their highest since at least 2007 with many countries running substantial deficits. US President Donald Trump’s tax and spending bill could add an extra USD 2 tn to US debt, while UK 30-year borrowing costs climbed to highs not seen since 1998, and France is expected to shell out EUR 62 bn on servicing its debt this year.

The private sector isn’t in the clear: Corporate debt costs, often benchmarked against sovereign bonds, are on the rise as well — particularly for long-dated maturities. “[T]he less control the central banks have on the long end, the more pressure that puts on the private sector,” Man Group’s Mike Scott told the FT.

And neither are creditors: With May being 2025’s busiest month so far for debt issuances, distressed debt exchanges and creditors jostling for priority in the repayment queues also saw an uptick, the Financial Times reported elsewhere.

Long or short? The spread between yields on two- and 30-year treasuries is at its widest in years, creating an issue for sovereigns, which rely on issuing a range of maturities to protect against market swings in interest rates, cater to different investors, and spread its refinancing risk.

The options? Central banks holding off on bond sell offs is an option, as is sovereigns opting for more short-term debt, although this exposes them more to market shocks and refinancing risk. However, keeping a lid on runaway spending is key, Royal London Asset Management’s Craig Inches told the salmon-colored paper.

THE CLOSING BELL-

The ADX rose 0.5% on Wednesday on turnover of AED 1.4 bn. The index is up 3.4% YTD.

In the green: E7 Group PJSC Warrants (+14.9%), Fujairah Cement Industries (+14.9%) and Abu Dhabi Ship Building (+13.5%).

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