Financial markets, particularly in established industrialised nations, are experiencing a significant shift in the interest rate landscape. This development is largely characterised by growing national debt. The yield on 30-year US Treasury bonds temporarily reached around 5.2 per cent, putting pressure on budget finances. Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM, interprets this development not as an indicator of an impending crisis, but as the end of a historically exceptional phase. The gross national debt of the USA has for the first time exceeded the 40 trillion US dollar mark, whilst 30-year US Treasury bonds simultaneously recorded their highest yield since 2007. This dynamic is also observable in other economic regions, driving up interest rates there.
A detailed examination reveals that this is less a new debt or bond crisis, but primarily a return to a historically average interest rate level. The exceptionally low yields of the past fifteen years were, according to Fischer, not a sustainable “new normality,” but rather a unique historical anomaly. In the 2010s, a structural excess demand for safe bonds dominated the markets. Central banks, credit institutions, and pension funds extensively acquired government bonds at the time due to regulatory and strategic requirements. This market environment has fundamentally changed.
Pension funds are increasingly diversifying their investments into equities and private assets. Simultaneously, deglobalisation is reducing the need for foreign exchange reserves. Foreign investors are focusing more on returns and less exclusively on security. In parallel, government deficits remain high, and indebtedness continues to rise. This leads to an increased supply of bonds meeting less elastic demand. Additionally, increased uncertainty as well as long-term inflation and fiscal risks act as interest-driving factors. Fischer points out that bond yields, unlike stock prices, tend to revert to a mean in the long term. This mean has declined over decades but cannot fall indefinitely. Human time preference and uncertainty about future developments set limits on the permanent reduction of real and nominal interest rates.
The return to higher yields therefore does not necessarily represent a failure of the financial system, but can be interpreted as a normalisation of a historically unusually favourable financing environment. Even central banks, whose influence is primarily concentrated on short-term interest rates, cannot permanently resist this development. Long-term yields are largely determined by the market – by inflation expectations, economic growth, national debt, and the relationship between supply and demand. Bond purchases or other forms of market intervention can only temporarily influence the long-term interest rate structure. This was confirmed by the US Treasury’s recent attempt to stabilise the market by expanding bond buybacks, which remained without lasting success.
The potential effects of persistently very low interest rates are visible in the example of Japan. There, decades of interest rate caps led to market distortions. So-called “zombie companies” were artificially kept alive, while necessary market consolidation was avoided. The consequences were low growth and a conflict between combating inflation and currency stability. Fischer emphasises that credible consolidation of public finances is essential to keep long-term interest rates permanently low – a realisation that has been increasingly displaced over the last two decades. The rising yields now illustrate the cost of growing indebtedness. In the USA, annual interest payments now amount to over one trillion US dollars, making debt servicing the third largest item in the federal budget.
This development has implications for the private sector: while savers benefit from better returns, borrowing becomes more expensive. In the USA, the average interest rate for 30-year mortgages is currently around 6.7 per cent. The corporate sector is also coming under pressure; companies that financed themselves at favourable terms before the pandemic now have to refinance maturing loans at significantly higher interest rates. For investors, there are both positives and negatives.
- —Long-dated bonds are once again showing a genuine term premium, which can make them more attractive for strategic portfolio construction.
- —At the same time, the risk for over-indebted companies and in interest-sensitive sectors is increasing, bringing balance sheet quality and refinancing capacity more into focus.
- —Those seeking security in government bonds must increasingly consider higher yields as compensation for a growing supply.
Although the transition to a higher interest rate level may bring short-term challenges, it could lead to greater fiscal discipline, more realistic pricing in capital markets, and increased transparency regarding the costs of national debt in the long term.
