The warning in wild bond moves

Axios

a day ago

Remember last week when investors worldwide shunned long-term government debt? Never mind. Long bonds have bounced back in a big way this week.
The big picture: That means some interest rate relief. But the extraordinary volatility of bond market action lately — including a rebound on mere glimmers of news — makes plain that all is not well in some of the most important markets on Earth.
Across major economies, bond markets are showing hypersensitivity to news about the future path of debt issuance, with Japan and the U.K. as Exhibit A.
Driving the news: The Japanese finance ministry sent a questionnaire to top bond dealers seeking comment on its bond issuance plans Tuesday, according to Japanese press reports. That was taken as a sign that the ministry will curtail its issuance of 30- and 40-year government bonds.
That news was enough to drive the yield on 40-year Japanese bonds down to 3.34%, from all-time records above 3.6% late last week.
Separately, the Financial Times quoted the head of the U.K. debt management office as saying the nation will reduce reliance on long-term borrowing in favor of short-term debt. Its long-term rates also fell.
Other rich countries' bonds moved in tandem, with the U.S. 30-year rate now back under 5%, after approaching 18-year highs last week.
State of play: Finance ministries worldwide face the vexing question of how to manage their debt burdens against the backdrop of elevated borrowing needs, worsening demographics, and rising fear among investors that they'll end up holding the bag.
One strategy would be to borrow money at shorter-term horizons, resulting in lower debt-service costs in the near term and less pressure on long-term rates — but that also leaves a country more vulnerable to a spike in rates.
The alternative is to finance themselves with more long-term debt, which locks up borrowing costs for decades to come. But it might come at the cost of substantially higher borrowing costs, as recent volatility shows.
Flashback: Treasury Secretary Scott Bessent and other President Trump allies criticized the Biden-era bond issuance tilt toward short-term debt, arguing it was a shadow form of stimulus.
But now they face a knotty question of whether to follow through on their critiques by trying to shift the U.S. debt profile toward longer-term borrowing, against an even more volatile market backdrop.
What they're saying: Writing in the New York Times on Monday, former budget director Peter Orszag wrote that"we should still attempt to extend some of our maturities now, both to reduce the risk of having to refinance so much debt each year and to hedge against further rate increases from this point forward."
That would be the opposite of what Japanese and British debt-issuance authorities are signaling — and risk the kind of spike in long-term rates that would rattle the global economy.