From "higher for longer" to "the new normal for longer": Oil price shocks combined with the AI bond issuance boom, the financial market ushers in the 5% U.S. Treasury yield as the "new normal"

The impact of geopolitical conflicts in the Middle East on energy transportation is being transmitted to global long-term financing costs through inflation expectations and expectations of tighter monetary policy. This is why, recently, the 10-year US Treasury yield—also known as the "anchor of global asset pricing"—as well as yields on longer-term government bonds, have continued to rise to historical highs not seen in nearly 20 years. After the Houthi forces seized Mocha Port and Perim Island, they further controlled the Greater and Lesser Hanish Islands, expanding their influence over the Bab el-Mandeb Strait and the Red Sea shipping channel. Meanwhile, the Saudi east-west oil pipeline, which bypasses the Strait of Hormuz, was attacked and shut down. Reuters revealed on September 17 that three pumping stations on the pipeline were damaged, after previously transporting about 4-5 million barrels of oil per day.

However, the current state of energy market supply does not mean that both major straits have completely ceased transportation, nor that international oil prices are rising unilaterally for an extended period. As expectations for partial restoration of Saudi oil shipments improve, Brent and WTI crude closed at $104.82 and $101.91 per barrel respectively on September 17, marking the second consecutive day of decline, but still remaining above $100 per barrel. For the global bond market, the key is not just the day-to-day movement of oil prices, but how long high energy costs will persist, and whether these costs will be further transmitted to transportation, production, and consumer prices.

The US Federal Reserve's rate hike has eased doubts about the Fed's resolve to fight inflation, but cannot alone reverse the structural repricing of global long-term debt. On September 16, the Federal Reserve raised interest rates by 25 basis points, increasing the target range for the federal funds rate to 3.75%-4.00%, implementing its first rate hike since 2023. The day before, the 10-year US Treasury yield—the "anchor of global asset pricing"—had already touched around 5.04%, the highest since 2007, while the Japanese 10-year government bond yield also rose to about 3.04%, a 30-year high.

This long-end pressure is also evident in the Japanese 30-year government bond yield, which is near historical highs, as well as the UK 30-year government bond yield, which has risen to its highest level since 1998. In terms of pricing mechanisms, central banks can influence future inflation and short-term interest rate expectations through rate hikes, but long-term yields also include the compensation investors require for taking duration risk. Therefore, "policy re-tightening" and "long-term yields remaining at high levels" can coexist, with the former not necessarily implying the latter will continue to rise chaotically.

The root cause of potentially new normal high yields is that the global bond market is shifting from "abundant savings chasing scarce safe assets" to "ever-increasing bond supply competing for buyers who focus more on price." Government deficits and debt refinancing increase supply, while central bank reductions in bond holdings mean more securities need to be absorbed by private investors. ECB Executive Board member Isabel Schnabel summarized this shift as a move from "global savings glut" to "global bond glut," noting that increased government bond supply is diminishing the convenience yield brought by their scarcity.

The total US federal debt has surpassed $40 trillion, with continued fiscal financing needs as a key backdrop to this change. Buyers who prioritize price require higher yields to compensate for holding long-term debt, while changes in pension systems have also weakened some traditional long-term buying power. Thus, understanding the "high yield new normal" doesn't mean yields will only go up and never down, but rather that the long period of near-zero interest rates and abundant liquidity post-COVID-19 is no longer the default benchmark for asset valuation. Long-term debt now offers a more attractive return starting point, while, compared to the post-pandemic period of strong liquidity driven by global central bank easing, equity markets will have to rely more on operational profits and cash flows to support valuations.

AI Debt Issuance Wave Joins Capital Competition: How Booming AI Infrastructure Investment Impacts the Long-Term Yield Curve

AI infrastructure construction is turning tech giants from investors relying mainly on operating cash flow into major borrowers in the global bond market. According to a report by Vanguard on August 19, the five hyperscale cloud operators—Alphabet (parent company of Google), Amazon, Meta, Microsoft, and Oracle—will issue on average about $35 billion of debt annually between 2020 and 2024, increasing to $93 billion in 2025, and already reaching about $132 billion for 2026 as of the report's counting date. For a broader ecosystem covering chipmakers, data center developers, and utilities, full-year AI-related debt issuance forecasts range from $300 billion to $570 billion. Notably, the latter is a forecast range for the year, not issuance already completed.

Specific transactions also show that the financing term is extending toward the long end: Alphabet announced in August a $25 billion US dollar note issuance including long-term bonds maturing in 2056 and 2066. An ECB study on August 31 further noted that large US tech companies now account for nearly 10% of new euro-denominated non-financial corporate bond issuance. Thus, AI capital expenditure is no longer just a theme in the equity market, but is also becoming a new, persistent source of supply that the global fixed income market must absorb.

The connection between AI debt issuance and long-end US Treasury yields is mainly about marginal capital allocation competition, not a direct one-for-one cash drain from the US Treasury market. From the asset allocation mechanism, for investors who can adjust positions between Treasuries and high-grade corporate bonds, long-term tech corporate bonds offer extra credit spreads and new allocation options. When governments and companies simultaneously expand long-term funding, the market must adjust yields and spreads to attract capital to absorb the new supply.

However, the two types of bonds are not perfect substitutes, as they differ in credit risk, collateral function, and regulatory use. Institutional investors interviewed by the media also overwhelmingly agree that the direct crowding-out effect of tech bond issuance on US Treasury market funds is limited; monetary policy and inflation expectations remain key drivers. More direct evidence first appears within the credit bond market—statistics show that yields and spreads on some large tech firms' newly issued bonds are higher than those of existing bonds with similar risk characteristics issued by the same company, reflecting the need for extra price compensation for concentrated supply.

Thus, the AI financing wave can be viewed as a structural incremental factor supporting long-term capital demand, but cannot be singly identified as the sole reason for US Treasury yields breaching 5%. Growth-oriented investment opportunities and higher capital costs associated with AI compute power and applications may coexist for the long term, and tech firms capable of converting capex into profit and cash flow will be better able to support their own valuations.

Why Do High Government Bond Yields Seem to Be Becoming the New Normal? From "Higher for Longer" to "Normal for Longer"—Global Long-Term Debt Is Being Repriced

As investors require more compensation to hold long-term debt, borrowing costs for governments worldwide have been climbing. Rising US bond yields have even prompted Treasury Secretary Scott Besant to announce an expansion of long-term Treasury buyback operations—but this intervention failed to prevent the 10-year US Treasury yield from breaking 5% and reaching its highest level in nearly two decades.

Investors' withdrawal from long-term sovereign bonds is being driven by a series of concerns. These include persistent budget deficits and stubbornly high inflation amid President Donald Trump’s trade war and surging energy costs brought on by Middle East conflict. At the same time, tech companies issuing massive debt to build AI infrastructure have forced governments to compete for investors’ attention.

Although the Federal Reserve’s September rate hike has alleviated some doubts about the central bank’s commitment to controlling inflation, the structural factors driving the bond sell-off have not disappeared, and yields remain elevated. The average bond yield across G7 countries has reached its highest level since 2000.

As shown in the chart above, government long-term borrowing costs have risen sharply—as illustrated by the yields of 30-year sovereign bonds in developed countries.

What’s Special About Long-Term Bonds?

Bonds issued by wealthy countries are widely viewed as the world’s safest securities, since their governments are highly likely to repay principal and interest to investors. Governments usually seek to lock in borrowing costs for long periods, such as 30 years. Some countries even issue bonds maturing in a century.

But that does not mean these bonds are risk-free for investors. If inflation and short-term interest rates rise, this will erode both the real value of coupon payments and the principal repaid at maturity.

The longer the bond’s maturity, the longer this effect from inflation persists. That is why long-term bonds are more sensitive to rises in interest rates and inflation, and why they are at the center of the recent sell-off wave.

In mid-September, the 30-year US Treasury yield hit its highest level since 2007, the Japanese equivalent neared its historical high, and the UK's touched its highest since 1998.

With Yields So High, Don’t Investors Want to Buy Long-Term Bonds?

Theoretically yes, but the bond market’s supply-demand structure is undergoing a fundamental shift. For much of the last 20 years, abundant global savings—especially from Asia—chased relatively scarce safe assets, helping lower long-term real yields. Then Fed Chair Alan Greenspan once called persistently low long-term yields a “conundrum,” because yields stayed subdued even as the Fed raised short-term rates.

Today, governments around the world are ramping up spending on everything from renewable energy to defense. The US is borrowing more to fund its national debt exceeding $40 trillion and plugging its annual budget gaps; the Congressional Budget Office estimated that the shortfall would reach $2.1 trillion as of August. Former President Trump has proposed a $5,000 “dividend” to every American adult if Republicans retain control of Congress in the November midterms, which could also spur more borrowing.

As global government debt supply expands, demand is limited by waning foreign investor interest and central banks reducing their bond holdings after years of purchases. ECB Executive Board member Isabel Schnabel described this shift as a move “from a savings glut to a bond glut.”

This means the investor base is shifting toward price-sensitive private buyers, who typically require higher compensation to hold long-term bonds. Structural changes in pension and retirement systems are also reducing the number of traditional long-term buyers.

How Much Extra Yield Are Investors Demanding for Long-Term Bonds?

According to a model developed by Bloomberg Economics, the so-called term premium—that is, the extra yield investors demand for holding long-term debt—has risen by over 3 percentage points from its pandemic-era lows.

The US traditionally enjoys a “convenience yield,” as Treasuries are liquid, safe, and can be used as collateral, so investors pay more and accept lower yields. Some argue that this privilege is being eroded—pointing to the growing burden of national debt and what they see as President Trump’s erratic policymaking as justification. Others think these concerns are exaggerated and that Treasuries remain the world's safest debt instrument.

Why Are Long-End Yields So Important to the Economy?

Disorderly bond market sell-offs can spell trouble for governments that rely on bonds for budget financing—the UK learned this lesson after the collapse of the Liz Truss government in 2022. Besant remarked earlier this year that the bond market “has brought down more governments than artillery.”

Long-term bond yields serve as the benchmark for pricing many consumer loans, including mortgages, and also for corporate debt rates. At a time when years of inflation have already made living costs harder to bear, rising bond yields could place further pressure on households who borrow. However, savers may benefit.

This transmission to the consumer credit market is not always direct. In the US, the pricing of the 30-year mortgage rate is more closely tied to the 10-year US Treasury yield than the 30-year, because homeowners typically pay off their loans or refinance after about 10 years.

The 10-year Treasury yield is known as the "anchor of global asset pricing," because of its benchmarking role in the dollar funding system and valuing mid- to long-term cash flows. The US Treasury market is large and liquid, and because the dollar is widely used for international financing and reserves, shifts in its yields have cross-market implications—US corporate bonds are typically priced off a comparable maturity Treasury yield plus a credit spread; mortgage rates are influenced by Treasuries and MBS pricing, while equity and real estate valuations are highly sensitive to the discount rate on future cash flows.

Theoretically, the 10-year Treasury yield is essentially the risk-free rate (r) in key equity valuation models—such as the DCF (discounted cash flow) model. If other variables (especially the expected cash flows in the numerator) do not significantly change—such as during earnings season when the numerator lacks positive catalysts—then a higher denominator, especially at 5%-plus levels (historical extremes), puts the valuations of technology stocks closely tied to AI, high-yield corporate bonds, and cryptocurrencies—those risk assets—at risk of a collapse.

What Can Governments Do to Handle Rising Long-Term Yields?

Many governments are shifting borrowing plans toward shorter maturities. Though yields are currently lower at the short end, these bonds mature sooner and will need to be refinanced more often—potentially at higher future rates.

The Bank of England has decided to stop selling long-term bonds from its portfolio to ease market pressure; the US has taken a different approach. The Treasury announced in August that it would expand buybacks of 10- to 30-year bonds to break what Besant called a market “fever.” But the first buybacks came in short of expectations and yields continued to climb to multi-year highs, with surging oil prices as a driver.

Fundamentally, governments must convince investors that they can control inflation and budget deficits. That may involve some combination of tax increases and spending cuts, which are rarely popular with voters.

Should Investors Worry About Surging Yields?

To some extent, rising yields are good news for bondholders. As equity markets flirt with record highs, rising yields reflect the global economy’s resilience and its ability to withstand higher borrowing costs.

After the global financial crisis, yields hovered near zero amid weak growth prospects. The recent climb in yields can be seen as a normalization back to pre-crisis levels. The 10-year US Treasury yield is now at 4.95%, just above the average of the past forty years.

“People like to use the term ‘higher for longer’ to describe today’s yield curve pricing,” Wells Fargo economists Tom Porcelli and Michael Pugliese wrote in an August research note. “We think a better description is ‘normal for longer.’”