The extra compensation investors demand to hold long-dated government bonds is likely to remain elevated barring an unexpected economic downturn, presenting opportunities to buy at higher yields, according to Pacific Investment Management (Pimco). Treasury yield has risen to levels not seen in almost two decades, as underperformance at the long end steepened the yield curve and pushed up the term premium. Pimco said long-term yields in Europe, the U.K. and Japan have also climbed.
Treasury Secretary Scott Bessent jolted markets last week by unexpectedly expanding planned buybacks of long-dated bonds just as the U.S. national debt topped $40 trillion and borrowing costs surged. The relief proved short-lived, with yields resuming their climb a day later amid persistent concerns over fiscal pressures and sticky inflation globally. JPMorgan Chase and PGIM have warned that less predictability in Treasury’s debt-management strategy may ultimately portend higher borrowing costs.
Billionaire Ray Dalio has urged investors to reduce bond holdings, warning a U.S. debt crisis could be just three years away. Pimco said additional fiscal stimulus in an economy that doesn’t need it and worsening expectations for government debt supply are key risks that could push yields into a higher range. Still, even after the recent rise, yields on longer-dated Treasurys and other sovereign bonds are only around their long-run historical averages, Pimco said.
Higher yields may ultimately benefit investors by generating more income, Pimco said. In 2022, starting yields were too low to offset price declines as rates rose rapidly. Today, higher inflation-adjusted starting yields may provide enough income to cushion against price drops, while broader bond-market performance remains resilient, according to Pimco.
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