Rising long-term yields

In the UK, the 30-year gilt yield (UK government bond) surged to 5.69%, its highest level since 1998. Market unease over the UK’s fiscal outlook is intensifying, as Chancellor of the Exchequer Rachel Reeves faces a GBP 35 billion budget shortfall ahead of the autumn budget. This has sparked debates over potential tax hikes or spending cuts. Waning investor confidence is dampening demand for long-term bonds, which is pushing up borrowing costs and exacerbating fiscal pressures. Among G7 nations, the UK holds the dubious distinction of having the highest borrowing costs. Comparisons to the market turmoil experienced under former Prime Minister Liz Truss have resurfaced, with analysts warning that the country could face structural vulnerabilities if decisive fiscal discipline is not restored.

Meanwhile, in the US, the 30-year Treasury yield reached 5%, marking its highest level in 18 years (excluding a brief spike in the second half of 2023 when rates temporarily exceeded 5% before retreating to 4%). Concerns about inflation, fuelled by politically motivated monetary policies, have driven yields higher on bonds with longer maturities. On the short end of the curve, meaning bonds with shorter maturities, investors are anticipating the Federal Reserve (Fed) to cut interest rates. This expectation has pushed two-year bond yields to their lowest levels since May. The widening spread between long and short-term bonds has made ‘steepener’ strategies increasingly attractive for investors. In a steepener strategy, investors aim to profit from a situation where the gap between long-term and short-term bond yields becomes wider. For instance, they might sell long-term bonds, whose prices are expected to fall as yields rise, and buy short-term bonds, as their prices rise as yields fall.

A similar trend is evident in Europe. The European Central Bank (ECB) has anchored short-term rates, but long-term yields are rising. German 30-year bond yields have reached 3.4%, their highest level in 14 years. This increase is due to the government borrowing more to fund defence and infrastructure projects. Other European nations are also experiencing multi-year highs in long-term borrowing costs. In France, political uncertainty is amplifying upward pressure on yields and widening the spread relative to German bonds.

The global surge in long-term yields reflects a common underlying factor: G7 public debt is at record-high levels. In this environment, we believe it is important to avoid taking on excessive duration risk.