Charlie Jamieson, Chief Investment Officer

Recent commentary has focused on the supposed perils of steeper sovereign yield curves, which have featured prominently in global markets. Bond vigilantes, after all, were said to be the only counterbalance to the severity of the U.S. Administration's Liberation Day tariffs.

But the sharp increases in longer-dated bond yields across the developed world this year have sparked broader fears on excessive government spending and fiscal sustainability.

Some have argued that rising longer-dated yields and steepening curves against a backdrop of widespread monetary easing is a harbinger of difficult times ahead. They see an end to U.S. exceptionalism, and a rebalancing of capital across the global economy.

After a very rocky start, U.S. Treasuries have been very solid performers, notwithstanding everything that has transpired under the present Trump administration.

Despite steep rises after Liberation Day, yields on thirty-year U.S. Treasury bonds have declined around thirty basis points since May, thereby generating significant capital gains (north of five per cent) for those savvy (or iron stomached) investors who rode out the volatility.

Moreover, most common concerns around rising ultra-long yields and yield curve steepening can be easily put to rest. Long bonds are essentially a liability management tool, designed to match insurance and pension liabilities (as was the practice in a past era).

In earlier times, defined benefit pension systems relied heavily on long-term government bonds as a core component of their investment strategy. These bonds have typically provided a predictable stream of income and capital preservation, which made them an ideal match for the long-dated liabilities of pension funds, essentially ensuring that future benefit payments could be met with minimal risk. Life insurers similarly favoured these securities to support long-term policy obligations, using them to stabilise portfolios and manage interest rate risk. In this way, ultra-long bonds were not just an investment, but a fundamental liability management tool, helping institutions align their assets with their financial commitments over decades.

Fast forward to today’s world of defined contributions and pension systems, and abundant life insurance reserves, where the key funds and institutions have enjoyed a sustained secular rally in risk assets (including equities and credit) that has more than replenished solvency ratios (post GFC drawdowns). As a result, there is less natural institutional demand for thirty-year bonds, which can affect pricing, yields, and how sensitive these bonds are to market movements.

Moreover, some markets are extremely long duration, like the U.K. which has an average duration of over fourteen years, versus Japan at around ten years, and the U.S. at just over five years. This means moves in ultra-long bond yields behave very differently to the rest of the market from a total returns and capital gains perspective. Put simply, markets with relatively higher amounts of longer-dated bonds on issue (like the U.K.) feel the ups and downs of yield moves far more than other markets (like Australia and the U.S.).

All of this is to say that there are deeper forces at play around the repricing of ultra-long bonds in recent times. We should not tar the rest of the market with that brush.

For investors, recent developments in ultra-long government bond yields highlight the complexity of global fixed income markets and the broader forces shaping asset returns. While headline risks like rising long-dated yields and steepening curves can attract attention, the underlying drivers such as changes in pension systems, institutional demand, and global monetary conditions, suggest that movements in long bonds are not necessarily reflective of broader market trends. Understanding these dynamics can help investors navigate volatility and assess how global developments may influence domestic markets.