Bond markets call time on the era of cheap government debt

For most of the past fifteen years, governments could borrow for almost nothing. Investors queued up to lend for thirty years at rates that barely covered inflation, and finance ministries planned their budgets as though that would never change. This autumn, the queue has thinned.

Yields on the longest-dated bonds have climbed for six straight weeks. Dealers at Northgate Financial Group and Meridian & Thames Bank describe auctions that clear, but only at a price. The buyers who once took whatever was offered, from pension schemes to central banks, are either full or stepping back.

"Nobody is refusing to lend. They are simply asking to be paid for it again."

The change matters far beyond the trading floor. Higher long-term rates feed into fixed mortgage deals, the discount rates used by pension funds and the cost of every infrastructure project a government hopes to build.

Shorter debt, sooner refinancing

Debt offices have responded in the obvious way: by selling fewer long bonds and more short ones. That lowers the interest bill today, but it means more debt comes due sooner, and at whatever rate the market then demands.

Strategists are divided on how long this lasts. Halberd Capital Partners, which runs one of the larger bond funds, has been adding long-dated debt for the first time in three years. One camp argues that an ageing population will always need safe long-dated assets, and that today's yields will draw those buyers back. The other points to the sheer volume of supply still to come.

What to watch next

Three dates will set the tone before the end of the year: the next round of budget statements, the first rate decisions of the winter and a run of unusually large auctions in November. Each one is a test of whether the buyers are still there.