The bond market is making itself felt again. Yields are rising at the long end of the curve.

Developed countries are aging, spending exorbitant amounts, running rising deficits, and lacking a realistic plan to repay their mounting debt. In theory, this should lead to rising interest rates. Yet, for most of the last 20 years, interest rates haven't risen—in fact, they've fallen. This so blatantly contradicted basic economic principles that some economists began to claim these laws had ceased to apply. Politicians bought into this narrative and piled on even more debt.

Only in recent years has the situation changed. Yields on 30-year bonds are rising in almost all developed countries – the cautious Swiss are the exception. The largest movements are visible in 30-year bonds, which fortunately hasn't had any serious consequences yet, as most loans are based on shorter maturities (except for mortgages in the US). A level of around 5% may seem high, but historically, it's not – the current yield on 30-year US bonds is only one-third of the levels in the 80s. Moreover, rates have been higher since the pandemic, yet the economy hasn't collapsed.

Close to a repeat of the 80s?

However, the 30-year bond market should not be underestimated, and the reasons for concern are real—not only because yields are unlikely to fall, but could rise even further. This doesn't necessarily mean a debt crisis with defaults and interventions. MFW extension, but global economic growth will likely be lower and the era of free money in developed countries will definitely end.

Is this a repeat of the 80s? Back then, high yields were the result of chronic inflation and markets adjusting to the new order after the collapse of the Bretton Woods system. Today, the situation is different, but no less worrying. The dollar's future as a reserve currency is no longer as certain, and globalization is clearly losing momentum. Moreover, long-term rates are rising at a time when European Central Bank lowers the feet, and Federal Reserve will likely do the same. If yields are rising despite monetary easing, it means the market perceives the risk as greater.

On the fiscal side, there's no sign of improvement yet. The US, Japan, the UK, and many European countries are drowning in debt with no real plans to reduce it. There are no serious strategies in sight to boost economic growth—unless someone decides "artificial intelligence will increase the productivity of the entire economy" for the plan. Maybe that will happen, but politicians aren't helping by increasing regulations while higher yields raise the cost of capital.

The last decades of low interest rates have lulled investors, companies, and governments into believing they can borrow without consequences—as if the world were free of economic constraints.

A market with almost 100% effectiveness in reducing profitability at the long end

Historical observations show that one market that almost always effectively lowers long-term bond yields is the labor market. A worsening employment situation, rising unemployment rates, weaker economic growth prospects, and the specter of lower consumer spending and lower inflationary pressures have all historically been 100% effective in lowering yields on long-term bonds. long end of the curve.

However, such a scenario doesn't sit well with politicians. In the current climate, it could even become a pretext for even greater fiscal stimulus, adding fuel to the fire. Nevertheless, the worsening labor market situation could lead to a decline in bond yields before the situation becomes so dire that governments or central banks are forced to intervene again. At that point, 5% yields may become a distant memory.

The first key data for this market and this narrative will be released this Friday and will be the reading on the creation of new jobs in the US economy (NFP) and the unemployment rate.