Key Highlights

• Rising bond yields are a global phenomenon
• Rising debt levels are seen as the most compelling explanation
• U.S. plans to issue at the short end of the curve could have unintended consequences

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Rising debt, rising yields

EXHIBIT #1: 30-YEAR YIELDS UP ACROSS THE WORLD

_{Source: BNY Markets, Bloomberg}

Since July 4, the 30y Japanese government bond yield has risen by 30bp, closing at 3.163% on July 13. The highest yield ever for this security since it was first issued in 1999 was achieved less than two months ago, when it touched 3.165% on May 22. Global yields have been rising around the world – not just in the U.S. or Japan. 
 
Looking at Exhibit #1, which plots G7 30y yields on July 14 vs. 10 months ago, September 13, we observe meaningful jumps in yields across the board. We chose a 10-month sample because mid-September last year saw recent lows in bond yields across our grouping. Overall, the average increase in yields across the seven countries was 80bp, ranging from a low of “just” 33bp for Italy to a high of 115bp in Japan, with the U.S. posting a 100bp rise in its 30y bond yield. 
 
Higher yields across the developed world are, in our opinion, not driven by inflation fears or by expectations of more hawkish central bank policy. On the contrary, for most central banks, market expectations are for lower rates eventually, except for the Bank of Japan. While in the U.S., short-term inflation expectations have risen in response to highly likely (in our view) tariff inflation, long-term expectations in this country and elsewhere are quite well-behaved. 

Rising debt, rising term premia

EXHIBIT #2: RISING TERM PREMIUM RAISES YIELDS

_{Source: BNY Markets,  Federal Reserve Bank of New York, Bloomberg}

Instead, our view is that rising yields are a symptom of rising government debt around the world. Without doing a deep dive into the sovereign debt dynamics of the world’s major economies, we would simply note that according the May 2025 IMF World Economic Outlook, the G7 is on a path to see aggregate government debt reach 125% of GDP by 2030, up from just 75% in 2000. We think investors feel inadequately compensated given rising debt levels and financing concerns, and they require lower bond prices (higher yields) to be induced to fund government borrowing requirements. 
 
We can see this very clearly in the U.S. sovereign market. The term premium is a theoretical concept which implies that investors demand additional compensation to hold a long-term bond as opposed to a series of short-term bonds. It’s the additional return required by investors to lend to the U.S. government at long horizons. This additional compensation is required to take into account liquidity, solvency and inflation risk as well as time value of money considerations.  
 
Although its existence is predicted by theory, and we cannot observe the term premium directly, it can be estimated. The New York Fed provides its own estimate of the term premium going back to 1960 daily for various bond maturities. There is none for the 30y bond, so we examine the term premium for 10y note and plot it against the yield in Exhibit #2. From the chart we can see the inexorable rise in the term premium. Since  
2022–23, when it was as low as –100bp, it’s risen to around +60bp today. 
 
Recent 10y yield movements have been almost entirely driven by the term premium, for as we said, inflation expectations derived from the difference between nominal yields and inflation-indexed bond yields are quite steady lately, also seen in the chart. It seems to us that this increase in the term premium is more related to the expected deterioration in the long-term fiscal outlook than it is to inflation concerns. Yields have been rising as investors deem current bond prices too rich given such concerns, requiring yields to rise – reflecting increased term premia. 

Front-end financing

EXHIBIT #3: SHORTER MATURITY DEBT ISSUANCE RISES

_{Source: BNY Markets, U.S. Treasury Department}

With the debt ceiling now extended, we have been anticipating a deluge of T-bills, and have written about it extensively in recent weeks; see here. This is not unusual. With the Treasury General Account (TGA) down to just above $350bn before the budget bill was passed, it needs to be refilled. Although the Treasury Department issued guidance last week that it aims to target a TGA of around just $500bn at the end of July, we anticipate that by September T-bill issuance will have been between $700bn and $1tn. Of course, Treasury could alter its desired level for the TGA. At the last quarterly funding in April, it revealed that it anticipates an end-of-September cash balance of $850bn, in line with previous quarters, even during the Biden administration. We’ll all be watching the quarterly refunding statement due out at the end of this month to confirm or change that quarterly cash balance target. 
 
More generally, there have been noises out of Treasury that the government will choose to fund itself at shorter maturities, aiming for relatively lower interest costs on the national debt. Already, as shown in Exhibit #3, T-bill issuance consists of over 20% of all marketable debt outstanding, and if this issuance strategy is followed, it could increase to a level well above 20%. The Treasury Borrowers Advisory Council (TBAC) has expressed a preference of a maximum of 20% of U.S. debt to be issued as T-bills but has relaxed that recommendation in recent years. We also plot the average maturity (in days) of U.S. debt supply through the years. During periods of heavy short-term financing, such as after the GFC, during the pandemic, and subsequently, this measure declines to reflect the presence of more bills in the market. 
Of course, while avoiding higher interest charges, which are likely to rise in any event, given what we discussed above, issuing a disproportionate quantity of debt at the short end has other risks and potential costs. As a matter of principle, ever-increasing debt supply at the short end, takes an economy faster and further down the road of fiscal dominance, a situation in which the size and structure of the public debt is such that monetary policy necessarily becomes subservient to fiscal needs. It’s hard to raise rates when so much debt exists on the short end of the curve and such a rate hike would damage public finances further. 
 
We know the administration would like to get longer-maturity rates lower – they have expressed as much – and it is pushing a variety of policies to do just that. Reform of the Supplementary Leverage Ratio (SLR), buybacks and short-maturity financing are all steps in that direction. We recently wrote somewhat skeptically on the SLR reform’s likelihood to bring yields down (see here), and buybacks may not be sufficient to have much of an effect. The third option – front end issuance – potentially carries with it a number of unintended consequences as well.

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