Cost of long-term US borrowing rose to a quarter-century high

The yield on 30-year US government bonds rose to 5.613% on September 29, the highest since June 2002. The sell-off in US government debt intensified amid investor concerns about persistently high inflation, expensive oil, and the Federal Reserve's future policy.

According to the Financial Times, the 30-year Treasury yield reached 5.61% during trading. On September 28, the official US Treasury figure stood near 5.56%, and in mid-month around 5.3–5.4%.

At the same time, shorter-term US government bonds continued to fall in price. The yield on the benchmark 10-year Treasury rose to about 5.29%. According to The Wall Street Journal, the figure approached the 2007 high of around 5.30%.

Bond yields rise when their market value falls. Thus, the current movement shows that investors are demanding ever higher compensation for long-term lending to the US government.

One of the main sources of pressure remains energy prices. Brent traded above $100 per barrel for most of September. Expensive oil fuels concerns that inflation will fall slower than expected and the Fed will have to keep interest rates high for longer or tighten monetary policy again.

An additional factor is the resilient performance of the American economy. Strong economic activity reduces the likelihood of a rapid Fed policy easing, while investors simultaneously demand a higher premium for holding long-term bonds due to growing government debt and budget deficits.

The rise in Treasury yields is important not only for the US budget. US government bonds are used as one of the main benchmarks for the cost of money in the global financial system. Rising long-term rates can increase the cost of mortgage and corporate loans, investment financing, and new government borrowing.

High yields are already putting pressure on the stock market. During trading on September 29, the Dow Jones fell by more than 300 points, and the S&P 500 and Nasdaq also declined, as higher yields on risk-free government bonds make stocks relatively less attractive to investors.

This is the second notable spike in the cost of long-term US debt in recent weeks. In August, Kurs wrote that the 30-year bond yield reached 5.31%—then the highest since 2007. In a month and a half, the indicator added about 0.3 percentage points more and now rose to levels not seen in over 24 years.