The Treasury continues to expand the scale of national debt issuance, while the Federal Reserve is gradually withdrawing from its role as a major buyer through balance sheet reduction. Given the continued increase in the supply of long-term national debt, who will absorb this new debt? The most noteworthy phenomenon in the global financial markets over the past year has not been whether major central banks have entered a rate-cutting cycle, but rather why long-term interest rates remain high despite rate cuts. Based on decades of experience, a decline in policy rates usually leads to a simultaneous downward shift in the entire yield curve. However, this cycle presents a different picture. Since September 2024, the Federal Reserve has cumulatively cut interest rates by 175 basis points, yet the yields on 10-year and 30-year US Treasury bonds have risen significantly. Investors are willing to believe that short-term interest rates will eventually fall, but are no longer willing to hold government bonds at extremely low yields for the long term as they have in the past. This phenomenon, seemingly a mere technical adjustment within the bond market, actually reflects a deeper pricing shift in global capital markets. For the past two decades, whether it was the bursting of the dot-com bubble, the global financial crisis, or the impact of the pandemic, the market has consistently believed in a fundamental logic: once the economy faces pressure, central banks will eventually lower financing costs by cutting interest rates, and long-term interest rates will return to lower levels. Long-term government bonds have therefore been not only safe-haven assets but also important anchors for the valuation of various assets such as stocks, real estate, and corporate bonds. However, today, signals from the bond market are challenging this long-standing consensus. The market's focus has gradually shifted from "when will the next interest rate cut come?" to "who will ultimately bear the burden of the government's ever-expanding debt?" Looking at the US Treasury market, the recent rise in long-term interest rates is not primarily due to runaway inflation expectations. During the yield increase, the contribution of the term premium is significantly higher than that of inflation expectations themselves. The so-called term premium is essentially the additional compensation that investors demand for holding long-term bonds. In other words, the market is no longer only worried about whether prices will rise in the future, but also about the uncertainty of fiscal policy, debt supply, and the political environment over the next ten, twenty, or even thirty years. The role of long-term government bonds is changing. In the past, investors viewed them more as natural safe-haven assets, their value primarily reflecting economic growth and inflation expectations; now, the market is increasingly focused on the long-term sustainability of public finances, so long-term government bonds are no longer just a safe-haven tool, but are gradually becoming a type of long-term investment asset requiring additional risk compensation. Behind this change is a systemic shift in the fiscal landscape of developed economies. The massive fiscal stimulus during the pandemic pushed the debt levels of most major economies to historical highs. After the pandemic, the market expected fiscal deficits to gradually return to normal, but reality has not followed this path. Whether it's industrial policy, green transformation, expansion of defense spending, or the increased pension and healthcare costs brought about by population aging, all indicate that government spending will remain high for a considerable period. Meanwhile, the political constraints of fiscal discipline are weakening, making deficit reduction increasingly difficult. The situation in the United States is most representative. As the Treasury continues to expand the scale of national debt issuance, and the Federal Reserve gradually withdraws from its role as a major buyer through balance sheet reduction, the market is forced to confront an increasingly important question: with the continuous increase in the supply of long-term government bonds, who will absorb this new debt? This problem is not unique to the United States, but a challenge faced by the global bond market. For the past two decades, Japan has been one of the most important sources of funds for the global bond market. The ultra-low interest rate environment prompted Japanese insurance institutions, pension funds, and banks to allocate large amounts of overseas bonds, providing stable buying power for the European and American bond markets. However, in recent years, Japan's interest rate level has gradually normalized, domestic bond yields have continued to rise, and the cost of currency hedging remains high, significantly reducing the attractiveness of allocating long-term overseas bonds. For the European and American markets, this means that a long-term stable marginal buyer is weakening, and the international capital flow pattern that was once taken for granted is changing. Similar signals have emerged in the European market. The 2022 turmoil in the UK gilt market was considered an exceptional event, but it reflected the same underlying issue: when fiscal expansion, increased debt supply, and persistent inflation occur simultaneously, long-term bond investors demand higher risk compensation. The recent surge in French bond yields above Italian bond yields sends a more symbolic signal to the market. This does not signify a return of the European debt crisis, but rather indicates that investors are reassessing the fiscal creditworthiness of different countries within the Eurozone. For a long time, France has almost naturally been considered a core country in the Eurozone, but the market is increasingly pricing based on fiscal condition rather than traditional status. The scope of the bond market's assessment of fiscal risk has gradually expanded from peripheral countries to core countries. Compared to the two famous bond bear markets of 1994 and 2022, the current rise in long-term interest rates has a significantly different nature. The 1994 adjustment was primarily driven by the Federal Reserve's rapid interest rate hikes, while the 2022 adjustment was forced by an inflationary shock that compelled major central banks to tighten monetary policy at an unprecedented pace. Both rounds of adjustments began with a sharp rise in short-term interest rates. Today, the situation is exactly the opposite: the Federal Reserve has entered a rate-cutting cycle, and pressure on short-term interest rates is easing, but long-term yields remain high. This means that the two ends of the yield curve are beginning to reflect different types of risk: the short end reflects more the direction of monetary policy, while the long end is increasingly affected by changes in fiscal deficits, debt supply, and term premiums. The market logic of "central banks dominating everything" that has formed over the past few decades is being gradually corrected. This is precisely why the current market exhibits a rather subtle split. On the one hand, the US stock market is near historical highs, the investment boom in artificial intelligence continues, and corporate bond credit spreads remain relatively low, indicating that investors' risk appetite has not weakened significantly. On the other hand, long-term Treasury yields remain high, indicating that the bond market maintains a stronger cautious attitude towards the future. Bond investors are actually sending an important signal: if the long-term risk-free rate cannot return to its low levels of the past decade, all assets relying on low discount rates and cheap financing will face revaluation. High valuations themselves do not necessarily mean a bubble, but the long-term coexistence of high valuations and high financing costs will significantly reduce the market's tolerance for mistakes and risks. This is particularly noteworthy in the field of artificial intelligence infrastructure investment. Data centers, computing networks, power systems, and communication infrastructure undoubtedly constitute one of the most important capital expenditure directions in the coming years. From a demand perspective, the investment wave brought about by artificial intelligence continues to expand. However, unlike many previous technology cycles, these projects are often characterized by huge investment scales, long construction cycles, and strong financing needs. In an era of ultra-low interest rates, the cost of capital is often not the key variable determining the success or failure of a project; however, in an environment where long-term interest rates remain high, the financing structure itself may determine the final rate of return. Large technology companies can support capital expenditures with strong cash flow, while operators who rely more on debt financing have to face higher capital costs. Therefore, judging the sustainability of AI investment requires not only considering the rate of demand growth but also the alignment between project cash flow, debt maturity, and financing costs. Looking at a longer historical period, the global financial market may be bidding farewell to an era that lasted for over three decades. From the 1990s until the outbreak of the pandemic, deepening globalization, continuous technological progress, demographic changes, and relatively restrained fiscal policies collectively drove long-term interest rates downward. The market gradually formed an almost self-evident belief: long-term capital would become increasingly cheaper. However, reality is changing. Geopolitical competition is driving increased defense spending, industrial policies are resurging, green transitions require massive investments, an aging population is creating sustained fiscal pressure, and a democratic political environment is making fiscal austerity increasingly difficult. Central banks can still determine overnight interest rates, but they are finding it increasingly difficult to determine the price of capital over the next few decades. In this sense, the current rise in long-term interest rates is not merely a bond market adjustment, but rather a repricing of the "fiscal state" by investors. Government bond yields no longer reflect only the prospects for economic growth and inflation, but also the market's judgment on the government's long-term debt repayment capacity, fiscal discipline, and policy credibility. The most important macroeconomic issue in the coming years may no longer be when the next interest rate cut will occur, but whether major economies can reassure the market that their ever-expanding debt remains on a sustainable track. When the market begins to doubt this premise, long-term government bond yields are often the first to react. However, rising yields are not the end point; they will eventually be transmitted to the broader financial system through changes in financing costs, asset valuations, and credit conditions. Therefore, changes in long-term interest rates are not only an internal issue of the bond market, but also an important window for observing the future direction of global economic and financial order adjustments.
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