The U.S. long bond yield has crossed 5% at least eight times in three years and never held there. Whether dragons or buyers lie above that level is a critical question for a global investor base that has turned sour on super-long-term government debt.
Some 17% of the U.S. Treasury's $31 trillion debt outstanding matures in more than 10 years, and the appetite for long bonds still matters. A whole cocktail of concerns - inflation, rising corporate debt, the dollar and foreign ownership - is making that appetite harder to sustain.
If you can wait the 30 years to maturity, of course, a 5% annual coupon from a U.S. Treasury seems a decent stream of income in an uncertain world. It's well above the 4.2% average of the past 30 years, and if you never touch it until the end, compound interest would more than quadruple your money over three decades.
Its potential real return is a different matter, however.
If the Federal Reserve succeeds in keeping inflation to its 2% target, a 5% long bond bags you a smaller 150% real gain in inflation-adjusted terms. Even if the Fed allows inflation to drift above the 2.3% average rate currently implied by the 30-year inflation-linked debt market , you would barely double your money in real terms with a 5% coupon.
Add the possibility - encouraged by the current administration - that the dollar's near 50% rise over the past 15 years is substantially unwound and overseas investors in U.S. bonds face an additional hit.
That matters more than it once did. Foreign investors' share of U.S. Treasury bonds of more than 10-year maturities has more than doubled to 14% over the past decade.
For everyone else, the obvious alternative over the past half-century or so has been pretty clear. Total return on the S&P 500, with dividends reinvested, would have seen your money expand 15-fold over the past three decades — and by roughly as much in the 30 years to 2016.
Inflation takes a bite out of that, too, but the relative returns are still stark by comparison.
Despite persistent fretting about compressed equity risk premia with stocks at record highs, the artificial intelligence boom continues to confound stock market and economic bears alike. Goldman Sachs, for example, now expects cumulative AI infrastructure spending of some $7.6 trillion by 2031.
Many of the "hyperscaler" firms leading the AI push are financing that spending with long-term debt, creating fresh competition for Treasuries from corporate borrowers in the hunt for debt finance.
Morgan Stanley expects record corporate bond issuance this year, with tech borrowing a big part of that. Investment-grade bond supply this year is tracking an annual rise of more than 20%, with longer-than-average maturities.
FIVE LIVE
That's just one of a hurricane of headwinds hitting sovereign debt, and long-duration maturities in particular.
First and foremost, debt piles are rising everywhere. Repeated shocks are preventing any significant retrenchment, with populist political movements from Japan to Europe and the U.S. promising ever more spending or tax cuts, and none willing to rein in rising deficits.
Lower tariff revenues than initially assumed - due in part to legal pushback - could push the 10-year cumulative U.S. deficit estimate $700 billion wider than even the already gloomy Congressional Budget Office estimates, Barclays said. That, in turn, could lead to higher coupon debt sale schedules and eventually rising "term premia" in borrowing rates.
At the same time, ageing demographics that once saw pension funds hoover up ultra-long government debt to match their long liabilities have now flipped in many places. These pensions are now being drawn, and those funds are moving down the maturity spectrum.
Inflation and inflation expectations are high - aggravated by another oil shock this year, rising trade tariffs and rancorous geopolitics that threaten supply chains and energy markets for years.
At the very least, that constrains central banks from further interest rate cuts, but keeps the risk high that the next moves may be up. And if rates don't go up soon, there's a growing risk that already high short-run inflation expectations now build further out over the decades.
Then there is the Fed itself. Kevin Warsh is set to arrive as Fed chair later this month with a stated aim of eventually reducing the Fed's balance sheet - and reducing the maturity of that $6.7 trillion stockpile. As it stands, some 36% of the debt on the Fed's books has a maturity of 10 years or more.
So, the 5% Treasury long-bond yield may be a welcome relief for banks holding bonds for regulatory reasons or foreign central banks needing to bank dollar reserves.
But as an investment punt? There be dragons.
(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)
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