As investors keep a close eye on rising long-term rates, governments are concerned about higher borrowing costs. But a solution is emerging to mitigate the impact on public finances: reducing debt maturity.
This is the current point of tension for investors: the bond market. And particularly the long end of the curve. In recent weeks, we have seen a rise in long-term rates in most developed countries.
Two factors have contributed to this recent pressure. First, fears about the deficit, particularly after the House of Representatives passed Donald Trump's tax cut plan last week.
Second, there are concerns about investor demand. Last week, demand was fairly weak for a $16bn issue of 20-year Treasuries.
A few days earlier, an auction of the same maturity in Japan had also attracted moderate interest from investors.
Reducing pressure on long-term bonds
This environment has pushed up long-term rates across developed countries. In the US, 30-year rates have exceeded 5%. In Japan, the 3% level has been breached for the first time since the beginning of the century.
As a result, to ease pressure on the long end of the curve, governments are now tempted to reduce the maturity of debt and therefore issue more short-term debt.
This change in the structure of debt mainly serves to reduce borrowing costs. The longer the maturity of a bond, the higher the interest rate. This is due to the existence of a term premium, which is the additional return demanded by investors for holding long bonds rather than rolling over their positions.
This option is reportedly being considered in Japan. Two sources told Reuters that the Japanese Ministry of Finance is considering reducing its issuance of ultra-long bonds with maturities of more than 30 years.
The Bank of Japan, meanwhile, could also modify its balance sheet reduction plans for fiscal year 2026, according to sources cited by Reuters.
Bond markets reacted strongly to the news this morning. The yield on 30-year Japanese government bonds (JGBs) fell 19 basis points to 2.84%, while the yield on 40-year bonds fell more than 20 basis points to 3.3%.
The special case of the UK
Japan is not the only country considering this option. In the UK, Jessica Pulay, head of the Debt Management Office, told the Financial Times that the government would reduce the maturity of its issues.
This move should enable the British government to reduce the cost of its borrowing, with yields on 30-year Gilts approaching 5.5% last week.
This tension reflects fears about the UK deficit and weaker demand from pension funds for long-term bonds.
However, reducing the maturity increases the amount of debt that needs to be renewed each year and therefore the dependence on the bond market.
Nevertheless, this move is justified because the UK has a particularly high debt maturity (14 years). By comparison, Treasuries have a maturity of around 6 years. The other G7 countries also have estimated debt maturities of between 6 and 8 years.
Finally, it is interesting to note that in the United States, the Trump administration's stated objective is the opposite. Under Joe Biden's presidency, the debt maturity was shortened to avoid locking in high yields over the long term. Now, Scott Bessent wants to see long-term rates fall so that more 10-year and longer-term bonds can be issued. But with a policy that tends to make investors wary of US assets, this goal seems difficult to achieve.
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