The Bill Nobody Wants

Central banks can do almost anything to short-term interest rates. They can raise them, cut them, buy bonds and, if necessary, force parts of the yield curve to trade where they want. Japan spent decades proving just how far that influence can extend. However, controlling the price of money for the next thirty years is a different matter.

And the long end of the curve is becoming increasingly difficult to ignore. The 30-year US Treasury yields more than 5.25%, the highest level in nearly 20 years. A 30-year Japanese government bond now yields 4%, while long-term UK gilts are closer to 6% than 5%. Only a few years ago, such levels would have seemed unthinkable. Lest we forget, somewhat lower gilt yields helped bring down the Liz Truss government.

Perhaps we should not be surprised. Governments have borrowed heavily, tariffs and trade wars are pushing up costs, defence spending is rising and central banks are stepping back from absorbing the debt. Now, another energy shock from the war in Iran has arrived. Eventually, someone has to pick up the bill and yields at the long end of the bond market may be exactly that.

Which makes the contrast with equities so fascinating. The S&P 500 remains close to an all-time high, seemingly looking through the current geopolitical turmoil, inherent risks and enormous government deficits. Perhaps equities are right to focus on strong earnings and technological progress, but bond investors are looking at the same world and demanding a much higher premium for lending to governments than we have seen in decades. Both markets cannot keep looking in opposite directions forever.