Yield curve conundrum

The sovereign bond market is going through a transformation as governments, particularly Developed econommies, try to manage their deficits and the bond issuance to finance them. In the chart below you can see that 10 year yields (red line) are going up since the pandemic, after more than forty years on a down trend. Inflation and too much debt have pushed yields up, breaking that long term channel. The blue line shows the average time to maturity, which is tending down, signaling that governments are having a tough time issuing long term debt at low yields, and preferred the short end of the curve at a time where central banks are cutting rates, trying to keep the cost of debt under control. As a consequence, we have shorter bonds and more expensive to service, which is the opposite of what a treasurer would like to see. Institutional investors and pensions need long term rates to match their liabilities, but are afraid to lock in low rates in an environment that is pushing yields higher. Perhaps the strategy is to create a long term debt supply deficit, to maintain long term rates artificially low, as governments deal with inflation, with the hope that long term yields will be low when they meee to extend durarions. Hard to see how that’s going to work out.

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