Yan Xiang: How to view the general rise in global long-term bond yields?

Since mid-August, long-term bond yields have significantly risen globally, especially in major developed markets: (1) Long-term bond yields have clearly increased: The 30-year U.S. Treasury bond is approaching the 5% mark again, the 30-year UK bond has risen to 5.7%, the highest level since May 1998, and the 30-year German bond has risen to 3.4%, a new high since August 2011; (2) Since the beginning of the year, the term premium for long-term bonds in developed markets has significantly increased: Calculated based on 30-year and 2-year government bonds, the term premium for French and Japanese bonds has exceeded 2%, the term premium for UK bonds has risen from 78 basis points at the beginning of the year to 170 basis points, and the term premium for U.S. bonds has risen from 61 basis points at the beginning of the year to 131 basis points; (3) The continuous rise in long-term bond yields puts pressure on global stock markets: The sustained increase in long-term bond yields puts pressure on stock valuations, with the ERP indicator significantly declining, bringing pressure to global markets.

The rise in U.S. bond yields is mainly due to concerns over the independence of the Federal Reserve and fiscal sustainability: (1) Trump continues to attack the Federal Reserve: The market is worried that the decline in the independence of the Federal Reserve will lead to increased inflation risks and heightened uncertainty in monetary policy, with the worst-case scenario being a repeat of the stagflation of the 1970s, which would be negative for long-term bonds; (2) Trump's tariff policy has been ruled illegal by the courts, leading to a potential sharp decline in tariff revenues: At the end of August, the U.S. Court of Appeals ruled that most of the global tariff policies implemented by Trump were illegal, and we are still waiting for a decision from the Supreme Court. However, if tariff revenues decline significantly, it means that the U.S. fiscal deficit may worsen.

The rise in European bond yields is mainly due to concerns over fiscal sustainability and increased inflation pressure: (1) UK: In Q2 2025, inflationary pressures are marginally rising, putting pressure on the Bank of England's monetary policy and long-term bond yields. Since the beginning of the year, the overall debt situation in the UK has worsened, with the expected deficit rate for 2025 being revised down from -3.8% at the beginning of the year to -4.4%. The failure of welfare cut plans, slowing economic growth, and high inflation have all contributed to the widening fiscal deficit, raising market concerns about the UK's fiscal sustainability; (2) Germany: The new fiscal plan is expected to significantly increase fiscal spending before 2029, with Germany's fiscal deficit rate potentially changing from a surplus of 0.6% in 2024 to -4.2% by 2029, and government debt as a percentage of GDP rising from 62.5% in 2024 to 72% in 2029.

Looking ahead, expansionary fiscal policy remains the global theme: (1) In the short term, the probability of long-term interest rates in developed economies remaining high is relatively large, but the space for further increases may be limited: The market's doubts about the independence of the Federal Reserve may persist until 2026, and both the U.S. and Germany will face supply pressures from fiscal bond issuance. The UK's fiscal issues may continue to ferment before the November budget announcement, all of which will put pressure on long-term interest rates. However, after a sustained rise in long-term bond yields, central banks and finance ministries usually increase interventions, limiting the space for further rate increases; (2) In the medium to long term, expansionary fiscal policy will become the main theme, and long-term bond term premiums may remain high: The increasing downward pressure on the economy due to trade wars, combined with rising defense spending in Europe and other economies under de-globalization, will all lead to demands for expansionary fiscal policies Asset Allocation Strategies under Loose Fiscal Policy: (1) The Value of Long-term Sovereign Bond Allocation Becomes Prominent: Long-term bond yields are high but may have limited room for decline; a coupon strategy is a better choice; (2) Positive for Gold: The world is still in a phase of government leverage, which continuously benefits gold in the medium to long term; (3) Neutral Impact on the Stock Market: Expanding fiscal policy is beneficial for stabilizing the economy, but rising interest rates put pressure on stock market valuations. Interest-sensitive sectors such as real estate and consumption are also under pressure, while technology stocks represented by the AI industry chain are relatively insulated from macro factors, but continuous attention to industry developments is needed.

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1. Significant Rise in Global Long-term Bond Yields Since Mid-August

Since mid-August, global long-term bond yields, especially in major developed markets, have risen significantly, attracting market attention: (1) Long-term bond yields have risen significantly: Since mid-August, long-term bond yields in major economies such as the United States, Europe, and Japan have risen sharply. The 30-year U.S. Treasury bond is once again approaching the 5% mark, the 30-year UK bond has risen to 5.7%, the highest level since May 1998, the 30-year German bond has risen to 3.4%, the highest level since August 2011, the 30-year French bond has risen to 4.5%, the highest level since July 2009, and the 30-year Japanese bond has risen to 3.3%, the highest level since 2006; (2) Significant Increase in Term Premium for Long-term Bonds in Developed Markets Since the Beginning of the Year: In addition to the significant rise in long-term bond yields, the term premium for long-term bonds compared to short-term bonds (calculated using 30-year and 2-year government bonds) in developed markets has significantly increased since the beginning of the year. The term premium for French and Japanese bonds has exceeded 2%, the term premium for UK bonds has risen from 78 basis points at the beginning of the year to 170 basis points, and the term premium for U.S. bonds has risen from 61 basis points at the beginning of the year to 131 basis points, indicating that long-term bonds are particularly under pressure; (3) Continued Rise in Long-term Bond Yields Puts Pressure on Global Stock Markets: The sustained rise in long-term bond yields in developed markets has put pressure on stock valuations, leading to a significant decline in the ERP indicator and putting pressure on global markets. U.S. stocks have consolidated since mid-August, UK stocks fell in late August, and German stocks have been consolidating since July, largely influenced by the continuous rise in domestic interest rates.

2. United States: Erosion of Federal Reserve Independence + Concerns Over Fiscal Sustainability

One of the triggers for the rise in U.S. Treasury yields in mid-August was Trump's continued attacks on the Federal Reserve, raising market concerns about the erosion of the Fed's independence, putting pressure on long-term U.S. Treasury bonds: (1) Since the beginning of the year, Trump has continuously attacked the Federal Reserve, and in August, he even threatened to fire Federal Reserve Governor Lisa Cook, escalating conflicts with the Fed: Since the beginning of his second term at the end of January, Trump has frequently criticized the Federal Reserve and Fed Chairman Powell on his personal social media platform Truth Social and in public appearances, Accusing him of delaying interest rate cuts and playing politics, aimed at pushing the Federal Reserve to cut rates through public pressure. On August 25, Trump requested the dismissal of Federal Reserve Governor Lisa Cook on the grounds of suspected mortgage fraud, escalating tensions with the Federal Reserve; (2) The market is worried that the decline in the independence of the Federal Reserve will lead to increased inflation risks and heightened uncertainty in monetary policy, with the worst-case scenario being the stagflation of the 1970s, which would be negative for long-term bonds: If the next Federal Reserve chairman aligns with Trump's wishes and commits to faster rate cuts, it would mean an accelerated pace of rate cuts by the Federal Reserve, which would benefit short-term U.S. Treasuries but lead to a significant increase in inflation risks, with the most extreme scenario being the stagflation environment of the 1970s, which would be negative for medium- and long-term U.S. Treasuries.

At the end of August, the U.S. Court of Appeals ruled that most of the global tariff policies implemented by Trump were illegal. If subsequent tariff revenues decline significantly, it means that the U.S. fiscal deficit may worsen: (1) Trump's reciprocal tariffs were ruled illegal, but there is still uncertainty pending a Supreme Court ruling: On August 29, the U.S. Court of Appeals for the Federal Circuit upheld the previous ruling of the International Trade Court by a vote of 7 to 4, determining that the International Emergency Economic Powers Act (IEEPA) did not explicitly grant the U.S. president the power to impose tariffs. The reciprocal tariffs and fentanyl tariffs imposed by Trump under this law were deemed illegal. On September 3, the Trump administration formally appealed to the U.S. Supreme Court, seeking to overturn this ruling, and the outcome is still pending; (2) If the tariff policy is ruled illegal, the U.S. fiscal deficit is likely to worsen, raising market concerns: In the short term, tariffs have already generated certain revenues for the U.S. Treasury. As of July, U.S. monthly tariff revenues had risen from $7.34 billion at the beginning of the year to $27.67 billion, and by the end of the year, it could increase to $40-50 billion, with annual tariff revenues approaching $290 billion, accounting for about 1% of GDP. If calculated on a monthly basis of $40 billion annualized, it would account for 1.6% of GDP. According to market expectations, the U.S. fiscal deficit rate in 2025 may be 6.3%. If we assume that tariff revenues are zero or need to be refunded, the deficit rate is likely to exceed 7%. From a medium- to long-term perspective, referring to CRFB estimates, under the current tariff policy, considering the economic impact of the tariff policy, tariff revenues from fiscal years 2025-2034 may range from $1.7 trillion to $2.6 trillion. However, if the trade court ruling is ultimately upheld, meaning the Trump administration can only impose "232" tariffs, tariff revenues are likely to drop to $800 billion. Considering the potential fiscal deficit of up to $4.7 trillion from the Inflation Reduction Act (OBBBA) for fiscal years 2025-2034, a significant reduction in tariff revenues means that the U.S. fiscal deficit is likely to worsen

From a longer-term perspective, the "One Big Beautiful Bill Act" passed in early July has significantly worsened the fiscal outlook for the United States, leading to a substantial increase in the term premium required for investing in long-term U.S. Treasury bonds. On July 4, Trump officially signed the "One Big Beautiful Bill Act" (OBBBA) into law. According to estimates from the Committee for a Responsible Federal Budget (CRFB), the OBBBA further exacerbates the U.S. debt and deficit issues. If the OBBBA is made permanent, the federal fiscal deficit is expected to increase by $5.5 trillion over the next 10 years, with the federal deficit rate expanding from 6.2% in 2024 to 7.9%; if the 10-year U.S. Treasury yield remains around 4.5% over the next decade, considering the current high proportion of interest expenses in the U.S. fiscal situation, the deficit rate may rise to 8.8% over the next 10 years.

3. Europe: Concerns over Fiscal Sustainability + Increased Inflation Pressure

Increased inflation pressure + exposed fiscal sustainability issues, UK bonds are the first to be affected: (1) Inflation pressure marginally rises in Q2 2025, putting pressure on the Bank of England's monetary policy and long-term bond yields: Starting in Q2 2025, UK inflation has marginally increased, with the July CPI year-on-year rising to 3.8%, while G7 economies remained relatively stable during the same period. UK inflation is significantly higher than that of the U.S. and the Eurozone, partly due to special factors such as rising water and sewage treatment fees and fluctuations in air ticket prices, but the core reason lies in weak productivity growth and excessively strong wage growth, resulting in constraints on the Bank of England's future interest rate cuts and upward pressure on long-term bond yields; (2) UK fiscal sustainability has once again become a market focus: Compared to the Eurozone, the UK has a heavier debt burden and often becomes a breakthrough point in the expansion of debt issues. The UK's fiscal deficit rate is projected at -5.1% in 2024, with an absolute value significantly higher than the Eurozone average (-3.1%), and government debt as a percentage of GDP is 96%, far exceeding the Eurozone level during the same period (87.4%). Since the beginning of the year, the UK's debt situation has deteriorated overall, with the deficit rate expectation for 2025 revised down from -3.8% at the beginning of the year to -4.4%. The failure of welfare cut plans, economic slowdown, and high inflation have all contributed to the expansion of the fiscal deficit, raising market concerns about the UK's fiscal sustainability, leading to increased selling pressure on long-term bonds and a noticeable rise in UK bond yields.

As a country with relatively good fiscal conditions, Germany's new fiscal plan is expected to significantly increase fiscal spending before 2029, which will also put pressure on German bond yields. In March, the German parliament approved amendments to the Basic Law to relax restrictions on government borrowing. On June 24, the German cabinet passed the draft national budget for 2025, with the German government planning to issue a large amount of new debt to repair the aging infrastructure of Germany, which also includes a package of stimulus plans to address the weak economy, while funding record defense spending. On July 30, the German cabinet approved the draft federal budget for 2026, with public investment listed as a key focus of government fiscal policy, and the scale of investment reaching a new high again after 2025. According to market expectations, by 2029, Germany's fiscal deficit rate may change from a surplus of 0.6% in 2024 to -4.2%, and the government debt-to-GDP ratio may rise from 62.5% in 2024 to 72% in 2029. Against the backdrop of significant expansion of government debt, German bond yields are also under noticeable pressure.

4. Looking ahead, loose fiscal policy remains the global theme

In the short term, the probability of long-term interest rates in developed economies remaining high is relatively large, but the space for further increases may be limited: (1) U.S. Treasuries: Trump attacks the Federal Reserve, and the legal risks of tariffs remain unresolved, while U.S. fiscal spending remains substantial, all of which put pressure on long-term U.S. Treasury yields. On one hand, before Powell's resignation in May 2026, Trump is likely to continue attacking the Federal Reserve and Powell, while the shadow chair, or potential candidates for the Federal Reserve chair, are mostly more dovish than Powell, and may be more inclined to align with Trump politically before taking office, indicating that market concerns about the independence of the Federal Reserve may persist; regarding tariff policies, we still need to wait for the Supreme Court's ruling, and the uncertainty remains high. If the Supreme Court ultimately rules that Trump's reciprocal tariffs and fentanyl tariffs are illegal, it would likely lead to a sharp reduction in tariff revenues, putting pressure on the fiscal deficit; from a fiscal perspective, the current U.S. fiscal deficit rate may be around -6.5%, marginally widening from -6.4% in 2024, with fiscal efforts still not low, providing support for long-term bond yields; (2) U.K. Gilts: The U.K. Chancellor of the Exchequer is expected to announce the fiscal budget on November 26. Due to setbacks in cutting welfare program spending, the market expects that the new budget will likely increase taxes, but further tax increases may suppress the already weak U.K. economy, and the fiscal issues in the U.K. may continue to ferment before this. Meanwhile, the inflation problem in the U.K. has not shown significant signs of abating, which may continue to put pressure on long-term bond yields; (3) German Bonds: After the passage of the budget bill, fiscal spending is likely to increase, which means that the scale of bond issuance is likely to expand subsequently, putting pressure on long-term German bonds from the supply side; (4) After long-term bond rates in developed markets continue to rise, central banks and finance ministries usually increase intervention, and the subsequent room for interest rates to continue rising may be limited: Continuous rising interest rates will trigger policy feedback. Central banks may choose to adjust their QT (Quantitative Tightening) approach. According to Bloomberg's forecast, the Bank of England plans to implement approximately £65 billion in quantitative tightening over the year starting in October, mitigating the impact on long-term bonds; the finance ministry can adjust the national debt issuance plan to alleviate the supply shock of government bonds. Taking U.S. Treasuries as an example, after the 30-year U.S. Treasury yield broke 5.0% on July 30, the U.S. Treasury announced that it would raise the weekly benchmark Treasury auction size to raise funds, rather than issuing cash management bills, as the former is more effective in reducing the market's shock from a large supply of new bonds.

However, from a longer-term perspective, under the pressure of economic weakness and the push for de-globalization, global public spending is likely to strengthen, meaning that expansionary fiscal policy will become the main theme, and the implied term premium of long-term bond yields may remain high: (1) The fiscal deficit rates of major global economies are likely to remain high or widen marginally: According to market expectations, the absolute value of the U.S. deficit rate is likely to remain above 6% from 2025 to 2027; Germany is shifting from a fiscal surplus to a fiscal deficit, and the absolute level of the deficit rate is likely to exceed 3%; the UK and France may maintain high levels; China and South Korea are also widening marginally; (2) Under the trade war, the pressure of economic downturn is increasing, coupled with increased defense spending in European economies under de-globalization, which will bring about demands for expansionary fiscal policy: In the context of the disruptions caused by Trump's tariff war, weakening trade demand, and long-term impacts such as aging populations and slowing technological progress, major global economies are facing pressures of economic downturn. In this context, fiscal policy will play a more important role as a counter-cyclical tool. On the other hand, in March, the EU launched an €800 billion plan, significantly increasing defense spending, indicating that European fiscal spending will be significantly strengthened in the future.

For major asset classes, the overall high interest rate + expansionary fiscal policy is favorable for gold, highlighting the allocation value of long-term bonds, while interest rate-sensitive sectors in the stock market are under pressure: (1) The allocation value of overseas sovereign bonds is highlighted: With interest rates at high levels, the allocation value is prominent, and coupon strategies are a better choice: Overall, overseas is still in a phase of expansionary fiscal policy, which means that there is still significant pressure on the fiscal supply side, corresponding long-term bond yields and term premiums may remain high, but continued rising interest rates may face policy intervention from central banks and finance ministries, highlighting the mid-to-long-term allocation value; (2) Long-term benefits for gold: The world is still in a phase of government leverage, especially for the United States, where the long-term deficit rate is difficult to decrease. This corresponds to the monetary attributes of gold, which may continue to be highlighted, providing ongoing benefits; (3) Neutral impact on the stock market: Expanding fiscal policy is beneficial for stabilizing the economy, but rising interest rates put pressure on stock market valuations. Interest-sensitive sectors such as real estate and consumption are also under pressure. Technology stocks, represented by the AI industry chain, are relatively insensitive to macro factors, but continuous attention to industry developments is necessary.

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