BIS's "Rescue of Long-term Bonds" Triggers Global Bond Market Rebound, but Institutions Warn the Rally May Not Last

According to Zhitong Finance APP, US Treasury Secretary Scott Bessent is planning to expand the scale of long-term Treasury buybacks. Although this move triggered a global bond rally on Wednesday, multiple analysts have warned that due to ongoing concerns about fiscal challenges and sticky global inflation, this rally may be hard to sustain.

Institutions such as Franklin Templeton, Australia’s Barrenjoey Markets Pty, and Nomura Holdings Inc. have pointed out that since many governments around the world are also facing pressures from mounting debt and rising budget deficits, the positive spillover effects of Bessent’s plan on other bond markets may be quite limited.

Driven by the continued decline in 30-year and 10-year US Treasury yields from multi-decade highs, government bond markets in the Asia-Pacific region (from Japan to Australia) strengthened across the board on Thursday, following the rally in European bond markets on Wednesday—although much of the gains in Europe gradually faded on Thursday.

This round of coordinated movement originated from the US Treasury's announcement of at least doubling the size of bond buybacks. This rare intervention also reflects Washington's growing unease about persistently high borrowing costs. However, analysts warned that due to entrenched concerns among investors over massive fiscal deficits, oil price-driven inflation, and broader supply pressures from the AI industry’s financing boom, Bessent’s plan may be just a short-term remedy.

"This will provide a circuit breaker for the global sell-off in long-term bonds," said Andrew Lilley, chief rates strategist at Sydney-based Barrenjoey Markets Pty. However, "this move alone is not sufficient to halt the rise in yields."

Since the US bond rebound on Wednesday, Japan’s 30-year government bond yield once fell by nearly 9 basis points to around 4%, marking the largest single-day drop since July 14. Australia’s comparable sovereign bond yields dropped by 4 basis points, the biggest decline in two weeks.

However, some investors remain unconvinced. Franklin Templeton maintains an underweight position on long-term bonds, believing Bessent’s move is unlikely to spark a more sustained rebound. As of Thursday, the yield on the 30-year US Treasury had risen again by 4 basis points to 5.23%.

"There are currently multiple forces simultaneously pushing yields higher and steepening the curve," said Andrew Canobi, Director of Fixed Income at Franklin Templeton. Major developed markets are all facing fiscal pressures and stubborn inflation. "As long as these forces dominate, I don’t see much support for long-dated bonds from the buy side."

In Europe, the 30-year German government bond yield was largely flat at 3.76% on Thursday, near its highest level since 2011—which was already reached before the US Treasury announcement. The 30-year UK government bond yield rose by 2 basis points to 5.80% after closing 5 basis points lower in the previous session.

"After the buyback announcement, pound rates flattened sharply in tandem with US Treasuries, but the UK has no equivalent policy signal and domestic fiscal risks have not disappeared," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International Plc. "We view yesterday’s long-end rebound as a tactical closing of positions, not the start of a sustained bull flattening."

Alex Everett, who manages European government bond funds at Aberdeen Investments, noted that the performance of European bonds may lag behind US Treasuries.

"The US Treasury’s intervention is a strong signal that Bessent and others intend to cap long-end Treasury yields, but this support does not extend to Europe or the UK," he said. "On this basis, it can be expected that these markets will show a degree of relative weakness."

Of course, the latest rally may also reflect some improvement in investor preference for the bonds of major economies with healthier fiscal positions.

That said, while governments and central banks do have powerful tools to influence markets, the long-term fiscal risks faced by developed economies are deep-seated, meaning investors are likely to continue testing the limits of these authorities.

"It’s always dangerous to go against those who make the rules," said Andrew Ticehurst, senior rates strategist at Nomura Holdings in Sydney. "But the fragile underlying fundamentals are real and becoming increasingly evident."