Tariffs, Federal Reserve independence, European pension reforms... What exactly is the global long-term bond market anxious about?

A sell-off without a clear trigger has once again tightened the nerves of the global long-term bond market.

Last week, the global long-term bond market experienced a sudden and severe turmoil. Among them, the yield on the 30-year U.S. Treasury briefly broke through the critical psychological barrier of 5%, triggering a chain reaction of corrections in the stock market.

However, according to the latest analysis reported by The Wall Street Journal on September 6, this round of sell-off lacks any obvious triggering events. Fund managers and market analysts have differing opinions on this, highlighting that the market is troubled by a series of complex and vague anxieties. From uncertainties in tariff policies to concerns about central bank independence, and to political turmoil across the ocean, various factors intertwine, suggesting that weak demand for long bonds may persist.

Tariff Ruling: The seemingly reasonable "culprit"?

A widely discussed potential trigger is a ruling by a U.S. federal court, which stated that the Trump administration could not impose tariffs on the grounds of an emergency. Theoretically, this could lead the government to refund tens of billions of dollars in taxes, exacerbating an already severe federal fiscal outlook. This interpretation seems to align with the timing: the ruling was made last Friday, while the market experienced its most severe sell-off on Tuesday.

However, there are many contradictions in this logical chain. If companies were to receive refunds of tens of billions of dollars, their stock prices should rise, but the stock market did not show corresponding gains. At the same time, the elimination of tariffs would remove a significant obstacle to inflation, and the market should expect an increased space for the Federal Reserve to cut interest rates, but the interest rate market did not price this in. Additionally, if the market is concerned about U.S. finances, foreign investors might sell dollars, but the dollar exchange rate has actually strengthened.

Long-term Concerns: Federal Reserve Independence and Government Borrowing

Concerns about the independence of the Federal Reserve are another long-standing risk. If the central bank is subject to political interference, it typically leads to interest rates being set too low, which in turn raises long-term inflation and undermines long bond prices. However, market data does not support this view. The key indicator measuring long-term inflation expectations—the 5-year/5-year forward breakeven inflation rate—remained stable at 2.34% at the close on the most severe sell-off Tuesday, well within the year's fluctuation range.

Similarly, concerns about the U.S. government's massive borrowing are not new. The enormous fiscal deficit post-pandemic means that the proportion of U.S. debt to the economy will continue to rise, which naturally requires higher yields to attract investors. However, data shows that the yield on 30-year Treasury Inflation-Protected Securities (TIPS) has only risen slightly, while the yield on the more liquid 10-year TIPS has significantly retreated from its peak in April.

Europe's Turmoil: Dual Pressure from Politics and Structural Reforms

Turning our attention across the ocean, the situation in Europe is equally concerning. France is mired in a political deadlock due to its minority government’s difficulty in implementing a budget plan to reduce the deficit, with the yield on its 10-year government bonds relative to German bonds recently rising to the highest level since the 2012 European debt crisis. In the UK, the government's budgetary woes and weakened pension demands continue to exert pressure on British government bonds (Gilts) However, the traditional safe-haven logic has not worked this time. In the past, when investors were concerned about issues in the Eurozone, they would typically flock to German government bonds, which are considered safe assets, but this phenomenon has not occurred recently.

More noteworthy is a deep structural change—the pension reform in the Netherlands. According to reports citing data from Goldman Sachs, the Netherlands holds about 80% of the Eurozone's pension fund assets. These funds are shifting from traditional defined-benefit models to ones more closely linked to investment performance.

This means that their demand for ultra-long-term derivatives and bonds used to lock in future returns will significantly decrease, and they may allocate more funds to stocks. Although this reform will take several years, it signals that one of Europe's main long-term bond buyers is quietly exiting the market, which poses a substantial bearish outlook for future demand for long bonds.

In summary, whether it is tariff rulings, fiscal concerns, or the political situation in Europe, none seem to independently explain this sudden market turmoil.

As the report states, perhaps that old market joke—"prices fall because there are more sellers than buyers"—is the most fitting description. However, when considering all these factors together, they collectively point to a troubling outlook: weak demand for long-term bonds may persist.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk