From “loss of anchor” to “return to blood”: long-term bonds have started a counterattack, and capital has returned to a long-term period

The Zhitong Finance App learned that long-term government bonds have been punishing investors who dare to hold them for most of this year. Today, the yield is high enough to attract a return of capital. Risk-free returns are close to decades-high, making them difficult for investors to resist, especially at a time when stock valuations are high and volatility is increasing. This month, the yield on 10-year US Treasury bonds once approached 5.4%, the highest since 2002; the yield on Japanese treasury bonds hit a 30-year high of 3.14%.

The return to long-term debt trading has attracted portfolio managers from various institutions such as J.P. Morgan Asset Management, Aegon Asset Management, Ninety One, and Allianz Global Investments. The yield trend has now been reversed: in October, the global 10-year and above government bond index yield was 2.2%, easily outperforming the flat performance of 1- to 3-year sovereign bonds. This is also the first time since February that long-term bonds have outperformed short-term bonds.

These profits, at least temporarily, prompted investors to ignore the risk of initially driving up yields. Energy-driven inflation, monetary policy tightening, and government fiscal deterioration have not gone away; it's just that the prices corresponding to taking these risks have become more attractive.

“The long term has fallen too much before, and pricing has lost ground,” said Bob Michele, head of global fixed income at J.P. Morgan Asset Management. He has been buying long-term bonds from Australia and Japan, as well as US treasury bonds.

Government bonds are once again looking like safe havens as investors question whether tech companies are over-committed when it comes to artificial intelligence. Exchange traded fund capital flows confirm this: the iShares US Treasury ETF attracted capital inflows for the second month in a row, while the iShares core S&P 500 ETF switched from inflows to outflows last month.

However, policy anxiety — related to the Federal Reserve, the Treasury, and elections — continues to suppress demand for long-term US debt. The Federal Reserve's decision to keep interest rates unchanged triggered a sell-off in US bonds, reigniting market doubts about whether Chairman Kevin Walsh is committed to the central bank's 2% inflation target.

On Thursday, long-term European government bonds also fell. Investors interpreted ECB President Christine Lagarde's remarks as saying that the central bank will not intervene to curb the sell-off caused by political and financial turmoil in France.

“I'd rather call it a suspension rather than a turning point because the pressure behind this year's sell-off has not gone away,” said Hillary Winn, investment director at AJ Bell. “We still prefer high quality and shorter terms rather than chasing a rebound in long-term debt.”

Next month's US midterm elections give even bond bulls reason to be cautious. A split in Congress may curb fiscal expansion and benefit long-term US debt; while the Republican Party unexpectedly holds both houses, it may rekindle the dispute between spending and inflation.

Oliver Faizarra, head of fixed income research at Raymond James Wealth Management, said that at the same time, economic slowdown and safe-haven capital may depress yields; while looser fiscal policies or escalating wars drive up inflation, they may trigger another round of sell-off.

Faizarra said that it is “difficult to give a reasonable fair value” in the US debt market in the long run.

Nonetheless, the fall in October yields gave US Treasury Secretary Scott Bessent some breathing room before his department issued a quarterly refinancing statement. The statement will announce the loan plan. After 30-year US Treasury yields soared to their highest level since 2002, market speculation that the US might cut the issuance of 20- and 30-year bonds heated up. This round of rebound reduced the urgency of related discussions, although many banks still expect such adjustments to arrive in 2027.

The appeal isn't limited to the US. Higher yields are attracting buyers into Japanese long-term bonds; German treasury bonds are benefiting from safe-haven funds triggered by unrest in France. In the UK, the Bank of England reduced the issuance of long-term bonds, and improved market sentiment towards Prime Minister Andy Burnham's new administration helped long-term Phnom Penh bonds outperform.

Royal London Asset Management has overallocated 30-year British Phnom Penh bonds over the past few months. Craig Inchis, the company's head of interest rates and cash, has always told customers that now is the right time to extend the term.

“We've seen bond yields rise, rise, and rise again,” Inchis said.