Rising issuance, falling demand and policy uncertainty is a toxic combination for bonds
U.S. 30-year real interest rates have jumped from zero to 3% in four years
These days the bond market clears at a higher yield. Investors are demanding higher rates when they buy long-duration bonds because there is less demand, higher supply and a hot mess of policy uncertainty. These three overlapping layers are responsible for higher rates and not just in the U.S. but everywhere.
This warning about bond markets is the subject of a special report by Mehmet Berceren, the senior market strategist at Rosenberg Research in Canada, whose title "The real rates reckoning" gives some indication of how he feels about the likely direction of travel for real interest rates, which is the yield on a fixed-income instrument when adjusted for inflation.
The warning is not coming out of left field. After the negative interest rate environment of the 2010s was brought to an end by the pandemic, real interest rates have been rising. U.S. 10-year bond yields BX:TMUBMUSD10Y have been climbing steadily, roughly 100 basis points, since the summer of 2024. Throughout 2025 there was much market talk of "rising term premia" - the extra reward bond investors were demanding for tying up their cash over extended periods.
U.S. 10-Year Nominal Yield, Real Yield, and Inflation Breakeven
The upshot of this is real interest rates on U.S. 30-year bonds have risen from a negative number in 2022 to 3% and those long-bond market yieldsBX:TMUBMUSD30Y have broken out above 5.2% recently.
Berceren is keen to emphasize that this isn't simply an American phenomenon. The same shift is visible across all major economies. Rates in all G7 countries have been on an upward trajectory.
The first problem is there are fewer buyers. After the global financial crisis and through the 2010s, central and commercial banks absorbed rising issuance through quantitative easing. As those policies have dwindled, the clearing yield must rise to attract other buyers. As Berceren explains, "This means long-term yields can remain elevated even when markets anticipate rate cuts."
It's not just central banks stepping back either. Changes to pension fund mandates and life-insurer trends have reduced their appetite for long-duration bonds. "The change," notes Berceren, "is gradual but structural." Moreover, as rates on shorter-maturity debt have climbed, so investors who previously had to go out to thirty years to find attractive rates, can now do that at the front end and the middle of the curve, below say ten years.
So falling demand is one part of the equation but what about supply? Government debt is rising almost everywhere and because rates have shifted structurally higher in this decade, the servicing of debt (paying interest on bonds sold) is necessitating higher issuance on its own. In the past, Berceren writes, heavy government issuance was associated with wars, recessions and financial crises. "Now it's increasingly becoming a feature of normal economic conditions."
The corporate bond market is also undergoing a revolution as it faces the supply wave prompted by the buildout of AI infrastructure. Just nine major tech companies plan $4.1 trillion in capex between now and 2030. If just half that is financed by bonds, that's 15% of the historical annual gross issuance of non-financial companies worldwide.
Big Five U.S. Hyperscaler Annual Bond Issuance
Timing is crucial, Berceren emphasizes. This supply wave is hitting at a time of record sovereign borrowing. Quantitative tightening, whereby central banks do not reinvest the proceeds of maturing bonds, also raises effective supply.
To crown the dual threat of falling demand and rising supply, policy uncertainty is also adding to upward pressure on rates. The U.S. has a new chair of the Federal Reserve and his commitment to fighting inflation has been questioned by some bond market commentators and economists.
Similarly, what happens in Japan is becoming more consequential. After decades of interest rates near zero, higher domestic yields BX:TMBMKJP-10Y may start to attract Japanese investors back home, potentially weakening a long-standing source of demand for U.S. Treasuries and European sovereign bonds.
In Friday morning trading U.S. 10-year yields were trading around 4.67%.
-Jules Rimmer
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