What were you doing back then? - Global market update

I don’t know if it was somebody in RTE or elsewhere that came up with it, but whoever was the brainchild for the “Reeling in the Years” programme deserves a hearty pat on the back. It isalways great to watch an episode and try to remember what you were doing in that year (provided you were alive of course!). Can you remember what happened in 2012, 2007, 1999 or 1998? The reason I ask is because when we look at global bond markets today, we are seeing things that haven’t happened since all of those years. In last week’s edition we talked about how we had just witnessed the highest interest rate for a long bond auction by the US Treasury – but it is not alone!

Last Monday saw the yield on the 30-year US Treasury top 5.3% for the first time since the eve of the Global Financial Crisis in 2007; a similar maturity bond in Germany is at a comparable yield to what it was on in 2012; Japanese 30-year yields have risen above 4% for the first time in their 27-year history, while equivalent UK gilts yield their highest since 1998. It’s hard to deny that long-dated interest rates are doing something genuinely rare. The drivers are familiar by now: oil has climbed on renewed US-Iran tensions; deficit projections keep moving the wrong way; and heavy borrowing for the AI (artificial intelligence) build-out is competing for the same capital.

In a world where the view on AI falls into two main categories – it is the saviour of mankind or the devil incarnate – it would be very easy for those in the latter camp to park the blame for higher long-term interest rates solely at the door of those money-hungry AI companies. The argument goes that when the ‘hyperscalers’ issue large amounts of debt to fund AI capex, investors require more capital to absorb both corporate bonds and Treasury issuance. All else equal, that pushes long-term yields higher, which increases the interest rate the US government must pay on newly issued debt. But that lets the governments off the hook too easily.

The total debt outstanding for the US government has now reached $40trn (that’s with a ‘T’); to put that in a historical context, it took the country nearly 200 years to rack up the first trillion dollars in debt but only 95 days to accumulate the last trillion! The US Treasury paid about $85bn to bondholders in its semi-annual coupon payment last Monday, the largest on record, and the total interest bill this year will be $1.4trn – by 2028, the US will be paying more in interest costs than it pays in social security payments!

Although current US bond yields might look high in the historical context of the last 20 or so years, in absolute terms they are still only at the mid-single-digit level – so many will askwhat’s all the concern about and can’t the government afford it? The problem for the US is that it is not just the administration’s funding costs that are affected – these yields set the borrowing rates for everyone else in the country from residential mortgages to commercial property development to pretty much everything else. And this comes against a backdrop where the minutes from the last US Federal Reserve (Fed) meeting showed a growing desire to move the official rates higher in the coming months.

If there was any serious doubt that the US administration is spooked by the rise of long-term borrowing costs, the announcement that we saw last week from Treasury SecretaryScott Bessent might put that to rest. The message came through loud and clear when he announced a ramp-up in buybacks of outstanding long-term US government debt. Buybacks in themselves are not unusual. But he said it would at least double them in the 10- to 30-year section of the market. The move marked a departure from the department’s longstanding “regular and predictable” approach to debt management — something Bessent himself endorsed in a speech in November.

Sounds promising doesn’t it until you realise that they will be buying back up to $4bn of securities out of an outstanding pool of $5.7trn – bucket and swimming pool come to mind! And in terms of the overall debt outstanding, it certainly makes no difference as the longer-dated debt is just being replaced by shorter- dated debt – and the administration continues to live beyond its means in terms of the budget deficit.

Some market participants see the ‘bold intervention’ as a turning point, with Washington taking a more active role in keeping down its borrowing costs. Coming after other recent efforts to rein in long-term yields, it’s reviving a concern that US policy could weaken faith in the dollar and push investors towards alternatives.

The dollar has weathered similar handwringing before. The Fed’s massive bond-buying programmes in the past stoked concerns that attempting to suppress yields and expanding its balance sheet could debase the currency. More recently, investors cut exposure amid Trump’s tariff threats and pressure on the Fed. None of these factors have dislodged the dollar from its dominant role in global markets. And, as the saying goes, this too shall likely pass.

In years to come when we look at the episodes of “Reeling in the Years”, we might ask what all the stress was about but, then again, perhaps this is a real turning point – only time will tell.