The [term premium](How Trump's policy risk is showing in Treasury bonds) on U.S. Treasuries, a key measure of how much compensation investors demand for the risk of holding longer-term bonds, has risen since the pandemic.
That reflects anything from concern about U.S. fiscal policy to the Federal Reserve cutting its bond holdings, longer-term inflation uncertainty as well as worries about clear communication under new Federal Reserve Chairman Kevin Warsh.
It's a global phenomenon. The term premium across major OECD countries reached its highest in over 10 years, the organisation found recently.
If there is one debt metric that has improved for some, it's how little investors are now willing to be paid to hold individual euro zone governments' bonds relative to those of Germany, which is deemed Europe's safest borrower.
The bloc has come a long way from its debt crisis when Greece needed a bailout and the risk of a euro zone breakup sent those costs surging.
Look at Italy. Once the poster child for debt woes, growing European cohesion after the pandemic, political stability and a lower budget deficit have pushed its debt risk premium to the lowest since 2008 recently.
In contrast, investors now attach greater risk to holding French bonds as a fractured political backdrop since a shock 2024 election slows efforts to rein in the budget deficit.
France, which faces a key election test next year, faces a sharp deterioration in its public finances over the rest of the decade unless policymakers act quickly to curb spending, an independent report commissioned by the government said in July.
Japan's benchmark 10-year bond yield is on the brink of hitting 3% for the first time since the mid-1990s, highlighting how inflation, rising fiscal concerns and monetary policy expectations are reshaping a market long defined by low interest rates.
Japan, the most indebted country in the developed world, is in the spotlight because the spending plans of Prime Minister Sanae Takaichi have rekindled fiscal concerns. The nation's debt sales are carefully watched for signs of stress and yields have risen sharply at bond sales in recent months.
It has trimmed longer-dated bond sales in response, helping stabilise demand. Still, borrowing costs face upward pressure.
And that creates a global quandary. If more attractive yields lure Japanese money home, what has been a pillar for U.S. and European debt markets for decades could start to crumble.
SPY•
