30-Year Treasury Yield Nears 4.90% on Deficit Fears
The US-Iran war has ignited a sell-off in long-term government bonds, driven by investor concerns over spiraling fiscal deficits. On Friday, the 30-year US Treasury yield climbed to nearly 4.90%, a near one-month high. Since the conflict began on February 28, the yield has risen by more than 20 basis points, a move that has completely erased the US Treasury market's entire gains for the year, according to a Bloomberg index tracking its returns.
This market reaction stems from expectations that governments will finance war efforts through massive debt issuance. The US Congress is already debating a potential $50 billion supplemental war appropriation. This new spending pressure comes as the US budget deficit already reached approximately $1 trillion in the five months leading up to February. The pressure on government finances is compounded by inflation fears from rising oil prices and the loss of tariff revenue.
Global Bond Sell-Off Spreads as Nations Prepare for Spending
The fiscal strain is not unique to the United States. A wave of selling has hit sovereign debt markets worldwide, with bond yields in the United Kingdom, Germany, Australia, and Japan all rising sharply. Investors are demanding a higher premium for holding long-term government debt as countries prepare for increased expenditures. In Europe, governments face pressure to raise defense spending while also subsidizing households hit by high energy prices. In Asia, nations including Australia and Japan are setting record defense budgets.
It reflects the market's expectation that Trump will need to spend money to pay for the war and subsidize consumers to cope with high oil prices.
— Gang Hu, Managing Partner, Winshore Capital Partners.
The market’s focus has shifted to the long-term fiscal health of governments. The rise in the 30-year inflation-protected Treasury (TIPS) yield this week signals that investor concerns go beyond the immediate economic cycle and now question long-term fiscal sustainability. Matt Eagan, a portfolio manager at Loomis, Sayles & Co., stated he sees no appeal in 30-year bonds "until the yield breaks through 5%."
US Mortgage Rates Climb to 6.11% as Turmoil Hits Home
The turmoil in the government bond market is already translating into higher borrowing costs for American consumers. The average rate on a 30-year fixed mortgage rose to 6.11% this week, up from 6% the previous week. Mortgage rates closely follow the trajectory of the 10-year Treasury yield, which lenders use as a benchmark for pricing home loans. The recent climb in Treasury yields, driven by war-related inflation fears, has pushed home borrowing costs back to levels not seen in five weeks, adding another headwind to the sluggish US housing market.
