U.S. Long-Term Borrowing Costs Surge to 5.15% Amid Fiscal Deficit Concerns

The cost of long-term borrowing in the United States has surged to 5.15%, driven by growing concerns over the widening fiscal deficit. The 10-year term premium, which measures the extra return investors demand for holding long-term bonds over a series of short-term bonds, has risen to nearly 1%, the highest level since 2014. This increase reflects investor worries about the U.S. government's plans to expand borrowing.

Following the recent downgrade of the U.S. credit rating by Moody's, the government's financing challenges have come into sharp focus. This was compounded by the passage of a multi-trillion-dollar bill extending Donald Trump's tax cuts and weak demand for 20-year Treasury auctions. The situation has raised alarms among investors and policymakers alike, with Newton Investment Management's fixed income head, Ella Hocha, warning that the fiscal dynamics could become self-reinforcing, leading to higher borrowing costs and potential economic instability.

This week, the 30-year Treasury yield reached 5.15%, nearing its highest level in nearly two decades. On Wednesday, the real yield for the same maturity, adjusted for inflation, closed at its highest level since 2008. Despite the market volatility, some analysts see this as an opportunity for investors to buy long-term Treasuries, as the U.S. government may heed the warnings from bond market "vigilantes" and control its debt levels.

The rise in long-term borrowing costs is not limited to the U.S. Other regions, including Japan, the United Kingdom, Germany, and Australia, have also seen increases in their long-term bond yields. This global trend underscores the challenges governments face in maintaining large-scale borrowing, especially in the context of trade tensions and persistent inflation, which limit the scope for aggressive monetary easing.

Investors have been pulling out of U.S. assets since the Trump administration imposed high tariffs on trading partners. Despite some tariff reductions, fund managers cite ongoing policy uncertainty as a significant concern. The sustained rise in long-term yields has raised alarms among fund managers from DoubleLine to PGIM, as well as central banks. The governor of the Philippines' central bank indicated that the bank might consider reducing its holdings of U.S. Treasuries in response to the Moody's downgrade.

Japan's bond market has been particularly affected by the recent sell-off, as the Bank of Japan reduces its bond purchases amid accelerating inflation. Traditional buyers, such as Japanese life insurance companies, have not been able to fill the gap left by the central bank's reduced purchases. Japanese Prime Minister Fumio Kishida warned this week that Japan's financial situation is worse than that of Greece.

Analysts are closely monitoring the impact of Japan's bond market turmoil on U.S. Treasuries. Deutsche Bank has cautioned that rising Japanese yields could make Japanese bonds more attractive to domestic buyers, potentially threatening U.S. Treasuries. Societe Generale's global strategy chief, Albert Edwards, noted that while U.S. bonds and equities have benefited from Japanese inflows in the past, this trend may now be reversing.

In summary, the surge in U.S. long-term borrowing costs reflects deepening concerns about the fiscal deficit and the sustainability of the government's financial position. The rise in the 30-year Treasury yield and real yield indicates that investors are demanding higher returns to compensate for perceived risks, which could have broader implications for the economy. As the U.S. government navigates these challenges, it will be crucial to monitor the impact of rising borrowing costs on economic growth and stability.