#MacroFriday: Yielding to Pressure

There has been considerable discussion around the rise in long-term US government interest rates. While European government bond yields have clearly moved higher since the beginning of the year, it is the long end of the US yield curve that is unchanged since the beginning of the year.

Unchanged? Hardly. Over the past six months, we’ve seen notable volatility. Following ‘Liberation Day’, the 30-year US Treasury yield fell to 4.3%, only to rebound sharply to a peak of 5.1%. More recently, including this week, the long end has eased somewhat again. Despite ongoing concerns, recent issuances of long-term debt were absorbed without difficulty, reflecting sustained investor demand. However, supply-side pressures persist, as substantial new issuance are anticipated in the coming months.

Meanwhile, fiscal concerns are mounting. The so-called ‘Big Beautiful Bill’ is expected to keep the US federal budget deficit above 7% of GDP annually throughout the current administration’s term, highlighting the continuing deterioration of the government’s fiscal position. Furthermore, the upcoming July 9threciprocal tarrif-deadline could add another layer of uncertainty and reignite market volatility. For the time being, it seems that investor aversion is directed more toward the US dollar than toward long-term US government bonds.

In Europe, the situation has evolved differently. Yield curves of European governments have steepened noticeably since the start of the year. The ECB’s rate cuts have anchored the short end lower, while the long end has moved upward. This move has been driven by Germany’s ‘Whatever It Takes’-moment, having resulted in a combination of improving economic activity outlook, firmer long-term inflation expectations, and a rise in risk premia. Investors are increasingly pricing in waning fiscal discipline, which is contributing to upward pressure on long-term yields.