Mike Dolan: The stress of the long-term bond issue in the G7 is intensifying.

The rise in government borrowing costs over the long term is not slowing down, and there are more aggravators every day. If you have been enthralled by the gravity-defying markets of this year, then look no further for where stress is growing in world markets.

The debt, oil, inflation and interest rate risks, combined with the domestic political and geopolitical uncertainties, as well as the waning demand from the private and public sectors for long-term bonds, have pushed borrowing costs in the Group of Seven (G7) advanced economies to their highest level in over 20 years.

According to ICE Bank of America's indexes, the implied yield of buckets of G7 Government Debt with maturities of ten years or more has risen this week above 4,6% for the first since 2004. This is the latest in a series of events that have culminated in the end of decades-long government borrowing rates that were ever cheaper.

Bloomberg's long-term G7 Bond Investment Index has almost halved its price since its peak 10 years ago and is still falling.

The 30-year U.S. Treasury's borrowing costs have topped 5% this week, the highest level in nearly two decades. Britain's gilt yields for 30-years reached their highest levels since the 1990s. Japan's equivalents also are on the verge of new record highs.

The Iran War and its associated energy shock ended some stabilization in early this year. The impact of the Iran war is highlighted by Tuesday's news that U.S. inflation surged to its highest level in almost three-years in April. After 11 weeks of war, the hopes for a peaceful agreement have once again been dashed, and crude futures year-end are now climbing towards $100 per barrel.

U.S. Treasuries, which account for almost half of the total G7 government's debt, are the elephant of the room. This is despite the fact that the grouping of rich countries has a number of domestic concerns.

Futures have wiped out all expectations of Federal Reserve rate cuts in this year. Inflation is now expected to be higher than 4% by May, which is more than double the central bank's goal. The markets are almost 80% pricing in the next Fed rate hike to occur as early as April next year.

This is despite President Donald Trump's appointee Kevin Warsh, who will be taking over as Fed chair later this week.

Whatever the outcome of?Warsh’s view on interest rates, his position on the Fed's $6.7 billion balance sheet of bonds will cause the long end to shake. Over a third (33%) of the debt on the Fed's balance sheet is made up of bonds with a maturity of at least 10 years.

LONG BOND SHIVER

The long-term debt situation in Japan is even worse. Its government debt exceeds a fifth the total of the G7.

The return of inflation after a long absence, the normalization of Bank of Japan rates following decades of near-zero interest rates and a new round of government spending stimulus from newly-installed Prime Minister Sanae Takaichi sent borrowing costs for long-dated loans soaring. The yields on 30-year bonds have more than doubled over the past two years.

The BoJ is pushed to tighten its belt by the ongoing battle to stabilize Japan's ailing yen. Meanwhile, Japan's life insurers and pension funds are losing their appetite for long-term debt due to ageing demographics.

The energy shock in the eurozone has been felt more than anywhere else. Markets are already pricing rate increases from the European Central Bank as early as next month.

This puts even more pressure on France's worrisome debt dynamics. The 30-year French debt rates are nearing their highest level in 17 years, amid ongoing political and budget tensions. Even in Germany, the 30-year yields on bunds have reached 15-year-highs following its sudden defense spending spree.

The UK gilt market will also be rattled by a rise in interest rates from the Bank of England.

Even that would have been acceptable if Keir's predicament as Prime Minister this week hadn't made it so.

The bond market was shaken by a possible challenge to his leadership from the left-wing of the ruling Labour Party, similar to what happened in Japan last year. This was due to?concerns about the UK's budget being loosened.

In recent years, the demand for super-long-duration bonds has been structurally shifted away in Europe. Dutch pension funds can now invest beyond this sector. British defined-benefit funds have also?retreated' since the budget and bonds shock of 2022.

The frantic rush by the so-called hyperscaler tech companies to invest hundreds of billions in the artificial intelligence datacenter boom is also prompting significant bond sales, many of which are in multiple currencies with super-long maturities.

The competition between governments to raise long-term bond finance is also increasing.

But markets have not yet viewed this as a true crisis.

One unavoidable result may be to front-load national debts with shorter maturities. Without a reduction in the overall debt, this will only increase refinancing risks, rollovers and potential volatility for sovereign borrowers.

Some say that the woes of government bonds are part of why savers and investment firms?seem to have no other choice than high-flying stock prices. A deepening squeeze in the bellwether government lending markets, which are the foundation of global finance would be difficult to ignore by any investor or wider economy.

The opinions expressed are those of Mike Dolan a columnist at. This column is great! Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)