(Bloomberg) -- The US 30-year bond yield is trading above 5% for the longest stretch since the dawn of the financial crisis, echoing investor concerns about a growing debt pile and sticky inflation.
So far this year, the 30-year has traded beyond 5% for 27 days — or about 19% of all sessions, the most since 2007, according to data compiled by Bloomberg. It traded above that level for 50 days that year.
Unlike 2007, however, the Federal Reserve's benchmark is 150 basis points lower currently, suggesting investors are demanding even more compensation for holding the longest maturity sold by Treasury than at the start of the subprime debt woes.
Behind the sustained rise in long-dated yields is growing concern about a deteriorating fiscal picture, just as a deluge of issuance to fund artificial intelligence infrastructure is flooding the corporate debt market. That's stirring comparisons to the era of "bond vigilantes," popularized in the 1980s when investors dumped government debt, driving yields higher to enforce fiscal discipline.
"The bigger impact is the very high level of sovereign debt and deficits that is keeping longer rates elevated," said Tony Rodriguez, head of fixed-income strategy at Nuveen Asset Management.
Since 2007, the Treasury market has ballooned to $31 trillion from $4.5 trillion while debt as a percentage of US gross domestic product has doubled to exceed 100%. All told, years of excessive spending have propelled annual interest cost above $1 trillion.
The US isn't alone among global governments having to finance large debt piles that soared since the 2020 pandemic. Still, with the exception of the UK, US 30-year yields are trading higher than other big debtors like Japan and France. Fitch Ratings recently warned the US debt burden sits "far above" other nations that share its AA score.
Debt concerns prompted Hoisington Investment Management Co., a renowned bond bull on the US long end for decades, to throw in the towel earlier this month, citing a "broader structural backdrop" of larger fiscal deficits and higher capital demand that could keep inflation and long-end yields higher.
Competing for debt buyers is also the over $500 billion financing linked to AI. For fund managers, that's a reason 5% plus yields are here to stay unlike similar spikes in the past.
"In every one of the instances that we saw 5% in the last few years, it was quickly bought," said Alex Payne, senior portfolio manager at Vanguard Capital Management. Traditional buyers of 30-year bonds, such as pensions and insurers now have "a wider menu of options than they've had in years past," said Payne, adding that he isn't sure yields have reached the highs yet.
"Whoever's issuing, be it a government or a hyperscaler or a non-hyperscaler, credit is now competing with more borrowers on that long end for the same group of investors," said Nuveen's Rodriguez.
On Wednesday the long bond was set to trade above 5% for a 12th consecutive trading session, eclipsing a streak of 11 straight days during May when the benchmark touched 5.2%, the highest level since 2007. The 30-year inflation-adjusted, or real yield, has risen some 50 basis points this year toward 3%, an area last traded in 2008.
The pressure on the US long end is sustained even as Treasury has gravitated toward hefty sales of short-dated bills, while keeping long bond sales steady in recent years. That could change as Wall Street dealers expect Treasury will start boosting two- to 30-year coupon auction sizes by May 2027.
"The deficit and outstanding debt and the potential for increases in Treasury auctions down the road are all fair game when you're looking at how to value the back end of the curve," said Kevin Flanagan, head of investment strategy at WisdomTree.
In contrast, shorter-dated benchmarks from two to 10-year notes have only risen back toward levels last seen in early 2025, even as the bond market switched gears from expecting Fed rate cuts to hikes later this year.
Money managers have generally favored owning maturities between five to seven years — the so-called belly of the curve — to limit losses from a long-dated yield spike in the event of a debt-induced rout.
"We don't go out beyond 10 years for non-taxable clients because in our view the risk-reward doesn't make sense," said Hank Smith, head of investment strategy at Haverford Trust. The firm increased exposure to short-dated Treasuries in recent months.
Smith said a constant question from clients over the past 20 years has been 'what about the total debt outstanding?' and his answer has been the same: "The bond market will let you know when debt is a problem for this country." While that's not showing up in weak Treasury auctions yet, Smith said a fiscally-led bond tantrum will test everyone.
"We do believe that the biggest risk for the markets, and that includes the bond market and the stock market, is the potential for the return of the bond vigilantes," he said.
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