The bond market turmoil has swept across the United States, Europe and Japan, and Goldman Sachs stated that the Federal Reserve may be forced to raise interest rates.
The global sovereign bond market is experiencing its most brutal sell-off in decades, with long-end yields continuing to climb under the triple pressure of inflation concerns, fiscal expansion and structural shrinkage in demand, leading to a sharp rise in government financing costs across countries.
Regarding the surge in long-dated bond yields, the head of Goldman Sachs' trading desk warned, the pressure on bond supply has become so significant that it is forcing the Federal Reserve to tighten policy even amid weak economic data.
The 30-year U.S. Treasury yield hit as high as 5.33% on Tuesday, marking its highest level since 2007; the yield on French government bonds of the same maturity rose to a peak since 2008; the yield on Germany's 30-year bonds returned to the level seen in 2011; the yield on UK gilts of the same maturity is approaching 6%; the 30-year Japanese government bond yield rose to its highest level since 1999.
As stated in an article from Wall Street CN, the aggregate yield of global government bonds has returned to the 2007 level. In addition, data compiled by Bloomberg shows that the average yield of the benchmark portfolio of investment-grade sovereign bonds has surged to about 4.5%, the highest level on record since 2015.
This round of sell-off is not an isolated event in a single market, but driven by global structural forces: ongoing geopolitical turmoil has exacerbated supply shocks and inflation risks, governments of various countries have relaxed fiscal discipline, while the demand from traditional long-term bond buyers is shrinking systematically. Analysts point out that this means the pricing logic for long-term fixed income assets is being rewritten; for the Trump administration, high financing costs have become a political pressure on the eve of the midterm elections.
In response, Rich Privorotsky, head of European cash trading at Goldman Sachs, explicitly wrote in an internal report:
"To some extent, the Federal Reserve may even be forced to raise interest rates in the face of weakening data, to flatten the yield curve and re-anchor long-term interest rates."
U.S. bond yields are under full pressure, with the long end bearing the brunt
The epicenter of this round of bond market turmoil lies at the long end. Since the end of June, the yield on 30-year U.S. Treasuries has risen by nearly 40 basis points in total. After hitting 5.33% in intraday trading on Tuesday, it fell back slightly to 5.28%, but still remains near a nearly two-decade high. In addition, the 10-year U.S. yield previously broke through 4.74%.
The reason why long-dated bonds lead the decline is that they are more sensitive to risk factors such as inflation. Justin Onuekwusi, Chief Investment Officer of St. James's Place, said:
"The signal the market is sending is: we expect higher inflation in the future, or at least greater uncertainty, so we demand higher yields for holding long-term bonds."
Skylar Montgomery Koning, a macro strategist at Bloomberg, pointed out that there is a key difference in this round of structural upward movement in yields: the expansion of deficits is taking place against the backdrop of an economy that is not significantly weakening.
"Normally, the expansion of deficits is accompanied by a weakening economy, and policy interest rates move down accordingly, providing a buffer for the bond market. However, the current pro-cyclical fiscal expansion means that governments are further increasing borrowing when interest rates are already high, pushing yields to continue to rise."
The possibility of the Federal Reserve being forced to intervene cannot be ruled out
However, Privorotsky's logic lies at another level.
He said bluntly, "The rise in interest rates is increasingly a supply issue, not a central bank discipline issue". In his view, short-end interest rates may move lower due to weak data, but the root cause of pressure on the long end has little to do with macro data.
The essence of the difference between the two sides is: the research team believes that economic data is too weak to support interest rate hikes; the trading desk believes that the huge scale of bond issuance by the U.S. Treasury Department and tech giants has made the data itself secondary.
Privorotsky believes that the continuous rise in long-end yields has gone beyond the scope that short-term economic data can explain, and the root cause lies in the unprecedented supply pressure facing the bond market.
Amanda Lynam, chief credit strategist at Goldman Sachs, gave specific figures:
The scale of AI-related debt issuance so far this year has reached 489 billion U.S. dollars, far exceeding the original full-year 2025 forecast of 322 billion U.S. dollars; the total issuance of dollar-denominated investment-grade bonds has exceeded 1.5 trillion U.S. dollars, approaching the historical record set during the pandemic, and the risk to the full-year forecast of 2.1 trillion U.S. dollars is "tilted to the upside"; in 2026, investment-grade issuance by ultra-large technology companies alone is expected to approach 250 billion U.S. dollars.
"A large amount of paper (bonds) needs to be absorbed, and real interest rates must rise to clear the market," Privorotsky wrote in the report. Extending this logic, if the Federal Reserve faces excessive steepening of the curve, the possibility of being forced to intervene cannot be ruled out — even if the economic data at that time does not support interest rate hikes.
Europe and Japan are under simultaneous pressure, and financing costs in multiple countries hit multi-year highs
Privorotsky pointed out that this problem is not limited to the United States.
France is facing the 2027 general election, and high debt, rising interest expenses and a complete lack of political willingness to impose fiscal constraints form a particularly intractable combination.
Japan is also facing a similar dilemma — trying to achieve economic growth, exchange rate stability, expansionary fiscal policy and a stable bond curve at the same time, these goals are becoming "increasingly mutually exclusive"; the yield on 10-year Japanese government bonds has risen to about 2.94%, the highest level in three decades.
In this context, Privorotsky's conclusion is clear: Real interest rates need to rise to a sufficiently high level to clear the massive bond supply. The front end may still benefit from weak data, but the long end will remain under pressure — and this is the fundamental reason why economists and the bond curve are no longer in the "same room".
The European bond market cannot stay out of the trouble either. The yield on France's 30-year government bonds has risen to the highest level since 2008, and investors are turning their attention to the political uncertainty brought by the 2027 budget negotiations and next year's presidential election.
According to Bloomberg reports, people familiar with the matter revealed that Germany issued 30-year bonds through a syndicated offering on Tuesday, paying the highest interest rate in 15 years.
As for Japan, although the absolute yield level is still lower than other major markets, the upward momentum of 30-year Japanese government bond yields is also sustained and strong, rising to the highest level since 1999.
Faced with the sharp rise in long-end financing costs, some countries have begun to adjust their bond issuance strategies, shifting to shorter-maturity varieties.
The UK authorities have suspended most of their planned long-term bond issuance programs. However, governments have very limited room for maneuver — in the new environment where they can no longer lock in decades of financing costs at ultra-low interest rates, policy options have been greatly narrowed.
For the Trump administration, the continuous rise in long-term bond yields is not just a market issue, but also a political hidden danger. High government financing costs are being transmitted to corporate loans and consumer credit, creating obvious pressure on the eve of the midterm elections.
Interest payments on U.S. public debt continue to be the core driving force behind the expansion of the budget deficit. So far this fiscal year, cumulative interest payments have reached 1.17 trillion U.S. dollars, a year-on-year increase of 15%, partly due to the rise in government bond yields. The annual U.S. deficit is close to 2 trillion U.S. dollars, and the total national debt is on the verge of the 40 trillion U.S. dollar mark.
Chris Iggo, Chief Investment Officer of AXA IM Core, now working at BNP Paribas Asset Management, said:
"The November election may bring more policy risks, and will keep the market highly focused on fiscal issues before the usual budget season arrives. Ideally, no one wants to face rising mortgage rates on the eve of a major election cycle, even if current rates are still lower than their 2023 levels."
The strategist team at Yardeni Research led by Ed Yardeni said on Tuesday that there is currently no reason to panic about the U.S. bond market, "We haven't pressed the panic button, but we are keeping a close eye on whether the bond vigilantes will do so."
Dual imbalance of supply and demand structure, real yields as the main driving force
It is worth noting that although inflation concerns are an important background for this round of sell-off, the long-end break-even inflation rate in most major markets — that is, the market's expected indicator of future inflation — has generally remained relatively stable. The rise in yields is mainly driven by real yields, which refers to the additional return investors demand for holding bonds on top of inflation compensation.
On the supply side, technology companies are issuing large-scale long-term bonds to finance artificial intelligence investments, further exacerbating long-end supply pressure. A recent decision by Alphabet, Google's parent company, to issue 5 billion Australian dollars (about 3.6 billion U.S. dollars) of bonds for the first time in the Australian bond market is one such example.
On the demand side, traditional long-term bond buyers are systematically exiting. Institutions such as pension funds have historically been a stable source of demand for long-term bonds, but as defined benefit pension plans decline and regulatory policies guide more capital to flow to stocks, this pillar of demand is shaking. At the same time, as the scale of government bond issuance expands, countries are increasingly relying on price-sensitive private investors to take up the supply.
The minutes of the Federal Reserve's June meeting show that officials have held special discussions on the changes in the structure of government bond holders — the main holders of bonds are shifting from the "price-insensitive official sector" to the "more price-sensitive private investors", a shift that may push up the term premium.
Anshul Pradhan, head of U.S. rates strategy at Barclays, said that this change in the buyer structure over the past decade has led to an increase of about 90 basis points in the term premium of 30-year U.S. Treasuries.
Faced with the continuous rise in yields, institutional investors hold mixed views on the market outlook.
Kelsey Berro, portfolio manager at JPMorgan Asset Management, believes that the current repricing provides a potentially attractive entry window for new capital. "We see more value at the long end, especially in terms of real yields," she said.
However, Iggo from AXA is more cautious:
"It is difficult to judge what level yields need to reach to truly improve the total return prospects of long-duration fixed income assets. The only thing that can change this situation is a sudden deterioration in economic data, or some kind of external shock — and the latter seems more likely to happen than the former."
This article is from the WeChat official account "Wall Street CN", Author: Dong Jing, published with authorization from 36Kr.