What’s Pushing Long-Term Bond Yields Higher?

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GREG HALL: Hey, everybody. Welcome to another episode of Accrued Interest PIMCO's podcast, dedicated to serving financial advisors and their clients and the wealth community at large. As always, I'm your host, Greg Hall. I lead the wealth management business here at PIMCO in the United States. Today is Tuesday, August 25th and it is 10 a.m. in New York City. And a bit of a surprise here, but we are in a very quick turnaround, joined again by Marc Seidner and Pramol Dhawan.

You'll remember them from not, you know, maybe three weeks ago when we did a podcast based on their PIMCO perspectives piece. And they have they've snuck a publishing event in here, in late August based on developments in the bond market that we thought would be of value for you all to know about. You can read it if you go to the website, of course, but we wanted to make sure we had them on the pod to talk through the piece and its implications. Marc, Pramol, thanks for joining us on short notice.

MARC SEIDNER: Thanks for having us.

PRAMOL DHAWAN: Always a pleasure to be here, Greg.

GREG HALL: Short notice of your own making. I didn't twist your arm to write this piece last week. It landed in my inbox and I said, oh, we gotta do a pod. Gotta do a pod.

MARC SEIDNER: Well, you know, we always said that we're gonna try to keep to a regular cadence on the perspectives piece, but when we have something to say and or there is something to say, there's a market dynamic that's worth addressing to try to provide information. That's the model we always envision. And there's no shortage of events or news items which have real market impact. There's no shortage of them these days. So maybe we'll be putting them out a little bit more regularly.

PRAMOL DHAWAN: There's no summer law for us.

MARC SEIDNER: Hopefully not. Yeah, there's no summer law.

GREG HALL: Yeah. Well, I speak for a large swath of PIMCO when I say that when you guys have something to say, nothing's gonna stand in your way.

All right, good. Well, it's interesting. So, the topic today is the long end of the curve. And I think any advisor listening is gonna realize in a heartbeat why we want to talk about that last year was, you know, a little bit of recent history. We saw the 30 year push up above 5.3 in yield, which is a bit of a local high here and a real event in the bond market. It's also a little bit, in talking to you guys, a little bit of a follow up from if you cast your brains, you know, way back to 2024, you all published toward the end of the year, a piece called Thoughts from the Bond Vigilantes.

And in that you know, as you talked about the way markets react to fiscal policy and the way that they will you know, over time sort of demand control of the rate environment you know, as they react to policymakers, you pointed out that, you know, we as a firm and you guys personally, little more concerned about lending to the US government over a 30 year time horizon than a 10 year time horizon.

GREG HALL: And while you liked adding duration to portfolios, you were finding other ways of doing it, other places to do it. And that's been a theme that we've returned to. And so here we are experiencing some of the bumps in the road that you all had said were likely going back at a couple of
years.

So, I'll give you the moment, right. Here's the, I told you so moment, but maybe just explain to people listening what happened last week? What do you think drove it? What do you think didn't drive it? And then we'll talk a little bit about the implications, especially as we lead into the Jackson Hole Conference.

PRAMOL DHAWAN: Yeah. Maybe I can just kick off. Look, rise in global term premiums has really been a global rise in term premiums. It's not been sort of US specific. The backend yields have moved higher in Japan, they've moved higher across Europe and France and the UK.

GREG HALL: And term premium, just, you know, kind of all things being
equal is just the extra rate of return that I require at a lender to lend you
money for longer.

PRAMOL DHAWAN: Correct. Right.

GREG HALL: It’s not credit necessarily. It's not an inflation view necessarily. Maybe they're all wrapped into it.

PRAMOL DHAWAN: Well, once you adjust for all of the factors, inflation adjusted, credit adjusted, what is the premium that you're left in the curve? And that rate has been rising and it's been rising sort of everywhere. It is acute in the, in the US because the 30-year real rate, the, the inflation adjusted rate broke 3%. And that sort of prompted the Treasury to announce some buyback auctions or to effectively do shift their maturities from, from the long end to the short end and do some net buybacks as well.

GREG HALL: So, this is so we pierce this 5.3 level, and then you're referring to the Treasury announced that it would purchase bonds farther out the curve.

PRAMOL DHAWAN: Right.

GREG HALL: And essentially issue, earlier in the curve.

PRAMOL DHAWAN: And that's not a typical at all. That is a very typical Moses up round eye for Treasury. If you sort of think about it as your own portfolio. If it were, when rates are very low, when that term premium is very low, they extend the maturity that that's good for the US government that's good for the US public finances to extend that maturity.

As rates have moved up and we've had this sort of 400 basis points repricing in the 10-year Treasury, and as that term premium has moved higher, they say to themselves, well, I don't want to validate the financing or the, the steepness of the yield curve. And then they start to shift that, those maturities back to shorter dated. Where it is cheaper for them to be able to finance because of that sort of steepness of yield curve.

But you do get some associated rollover risks. So, there are sort of give and takes in those, but I would just first say that this is a typical process. This is not atypical. And it sort of happened at a time where global term premiums have been moving higher, and it's happened in the time where in the US in particular, we've seen a very large amount of financing from corporate hyperscalers for AI related issuance.

And if you like, the public and the private sector have been sort of competing with one another for the scarcity of balance sheet, the scarcity of financing, and all of those factors combined together in addition to the geopolitical sort of backdrop that we've seen have pushed term premiums gradually higher in the backend.

And I think the treasury has sort of quite rightly announced a little bit of a pause to that by saying, we're not gonna validate market yields by issuing in the backend. In fact, we're gonna issue a little bit more on the front end and do some circle buybacks.

GREG HALL: Yeah. That of course was an event last week that grabbed a lot of headlines. If we back up maybe just a little bit, and maybe Marc, I can get you in on the conversation. Let's pull on that string that Pramol offered there, whether it's the AI demands on the debt markets, whether it's fiscal policy, what do we think drove the 30 years to that point to begin with that prompted all of this focus and maybe made too much of what was an ordinary administrative intervention?

MARC SEIDNER: Yeah, I mean, I think there's been a confluence of events, Greg, that didn't necessarily come to a head last week, but it certainly was the front and center in a lot of investors' minds, and certainly in the media and the press. I mean, as you pointed out, we commented on this almost two years ago, right? That this risk of deteriorating debt and deficit dynamics, not just the United States, but around the world, would lead to these periodic flareups of uh-oh.

Like we just crossed $40 trillion of debt and debt to GDP is now greater than a hundred percent in the United States. And that in and of itself is not exactly a moment, but it is a reminder. And as we said, you know, the bond market vigilantes are gonna play their hand every once in a while, when there are these flareups of concern.

You combine that with an incredible amount of hyperscaler issuance which is creating a crowding out effect, probably on both sides. There are ongoing, and this has been highlighted by dissenters at the FOMC and the Federal Reserve you know, ongoing concerns about the stickiness of inflation. I think we might have a slightly different view than, than some of those centers or the most hawkish.

But there is this ongoing concern about the stickiness of inflation. And you put all of those events together and we've had a moment that has led to a backup in rates and a steepening of the yield curve, interestingly enough, I mean, I just said that part of it has been inflation concerns. I think that's a perception of inflation concern, because this has really been a real rate event.

Right? So, the real yield on inflation protected bonds, as well as the nominal yield on nominal bonds have both gone up almost in lockstep. And the market's pricing of inflation expectations hasn't really moved all that dramatically. So, I, again, going back to our piece from a year and a half or two years ago, I think this is one of those flare ups that is increasing term premium, increasing that inherent risk premium in intermediate and longer-term bonds and is probably setting up for some decent longer-term returns. And that was our point in the paper.

GREG HALL: Now you made the point early in the paper, and I thought it was very interesting about the fact that real yields were expanding at the same pace as the nominal yield and that the forward curve of inflation expectations really hadn't moved, which I just think is very interesting in the context of every headline you read links the rate increase to inflation. And you guys clearly don't see that at least as a sole motivating factor.

PRAMOL DHAWAN: Yeah. That's right. And maybe to add a slightly more positive spin to this. Global growth has been great. It's held up really well. So, some of this steepening in term premium, the movement higher in yields is because we've come out of the malaise in post-COVID, we've sort of accelerated in global growth.

You've had this great productivity tool that we didn't fathom five years ago. It's sort of hitting the market in the US, but it's wider than that. It's expanding. You're seeing Taiwanese real growth at 12%, Korean growth, you know, gangbusters. The AI CapEx story is beyond the US borders, and that's naturally gonna push yields higher, and that's naturally gonna cause a steepening of the curve. But, you know, as we sort of said in the piece, that's not necessarily a bad thing.

You can sort of carry and roll your way down the term premium and extract good income. And we worry when rates are too low, artificially too low, we worry when term premium is too flat and the yield curves are too flat. Because there's no alpha to be generated there, so much rather have it this way round than before. But granted, there is a path destination issue, and that movement higher has been quite bumpy. And it begs a lot of questions about, you know, the trade-offs between fixed income and equities.

GREG HALL: What, just speaking of AI, how much credence do you give to the notion that these mega deals are crowding out demand for US treasuries or other sovereign risk?

MARC SEIDNER: I think it's indigestion. I mean, I don't wanna be too blunt about it, but I think we've had a moment in time with that is unique in its scale and scope of issuance across the hyperscalers. And I think the market is suffering from some indigestion. I mean, you know, they're still super high-quality companies, but even there, credit default swap spreads, an indication of, you know, their credit worthiness, have increased as well as yields and term premium have increased. So, I do think that there is a meaningful impact there. And I would say it's, you know, as simple as indigestion. I think there's a real question as to …

GREG HALL: You mean like too much too fast, right?

MARC SEIDNER: There's too much, too fast.

GREG HALL: Like my doctor tells me. Maybe not too much too fast. Yeah.

MARC SEIDNER: Yeah, I know Labor Day is still two weeks away, but. maybe I'm worried about Labor Day.

GREG HALL: Let this be, everybody listening, not too many burgers too fast.

MARC SEIDNER: I think there's a couple questions. One is, you know, clearly the Treasury, the Treasury has a mantra being regular and predictable, and so maybe he's deviating slightly and being slightly more activist, but, you know, not unlike the intervention in the yen, which was coordinated with the Japanese authorities, it could very well be that the signal there is we will not allow certain markets or market participants to create disorderly outcomes, which could have knock on consequences beyond financial markets to the broader economy and to broader financial stability.

And I personally think that that's true about the coordinated intervention in the yen. We're not requiring the yen to go back to 150 or 140 or 130, but we're not gonna let it go, and we're gonna demonstrate that we have the toolkit to not let it go to 180, 190 or 200. I think that might be the same with buybacks. We don't wanna set a price.

We're not repressing, it's the actual, the opposite because we're buying back, not forcing people to own. And we're not gonna let longer term yields become disorderly because that has a very direct impact on American households, whether it be through the mortgage market or other borrowing markets. And that seems perfectly reasonable in terms of a policy.

GREG HALL: You guys make the point in the piece also that the 30 year is not the tenure. And speaking of mortgages, obviously, that most of them, you know, price of the tenure and sort of deeper into the earlier part of the curve. What do you think about the tenure? I think maybe, sorry, go ahead, Marc.

MARC SEIDNER: No, I mean, I'm glad you brought that up because it's something I was gonna say a moment ago. You know, the tenure, we point this out in the piece. The tenure has been in a range of three- and three-quarter percent to four- and three-quarter percent for the last three years plus years. And we touched four and three quarters last week. We've sort of bounced off of it a little bit, but that range has been stress tested through an awful lot of news cycles, right? I mean, there's nothing new in debt and deficit dynamics. We know, I mean, the projections have debt to GDP continuing to increase through the balance of this decade. And in the next decade. We know that the US runs a 7 percent budget deficit.

We know that revenues are 17 percent, and expenditures are 24 percent of GDP. There's nothing new there. That three and three quarters to four and three quarters range has held with growth, with exceptional US growth from 2023 and 2024 to resilient US growth, and now to the sort of the K-shaped economy. Those questions, it's held through Fed tightening cycles, Fed easing cycles, Fed neutral cycles.

It's held through two Fed chairs. Now it's held through the post-COVID environment. And today it's held through two hot wars. It's held when crude oil was $60 a barrel or $130 a barrel. And so, the question that I remember doing a call with some of your folks a few weeks ago.

GREG HALL: I was just thinking of that call. Yeah, absolutely.

MARC SEIDNER: The question isn't, you know, the question should be what do the folks that are saying that we should have much higher yields. What did they know that hasn't been sort of explored or identified within the last three years? The new factor is the AI issuance. And I think it's very possible that that's what's pushed us to the upper end of the range.

Maybe it breaks us, but we all, but again, we all know that the hyperscalers are investing like gangbusters and that investing has gone from free cash flow to now debt financed. I think there's no open question as to whether or not there's some price sensitivity there, and there's a spread or a rate or level that they wouldn't pay for the marginal investment.

GREG HALL: But it's certainly been well heralded.

MARC SEIDNER: It's known. And so yeah, I mean, our sense is that the range continues to hold because it has been, it has really been stress tested.

PRAMOL DHAWAN: I also think it's important, and I completely agree with everything Marc said there. We don't lose sight of the importance of the US winning in this AI race and whatever winning looks like. This unprecedented CapEx spending is for a reason.

This technology is super innovative. The US has currently a lead over China in this. And Marc was quite right in saying that there has been some sort of crowding out effect in this. So, when we see it ourselves when you see very large auctions, when you see hyperscalers issuing in the public markets, when you see them going off balance sheet and doing more innovative structures as well.

There is some kind of crowding out effect. But it's important to sort of note that the Treasury's sort of standing aside a little bit and saying, okay, we can allow the hyperscalers to do what they do and we'll test the marginal sensitivity to rates, but there's no sense in us sort of competing and fighting over one another to push yields higher.

And there is a bigger story at large here on and above, you know, percentages on 10 years and 30-year interest rates as well. So, I think that's very important and again, we think it's eminently sensible to be able to do that. And nothing is, which has not been done in previous vintages of the Treasury.

GREG HALL: Well, and it's interesting because we've been talking mostly about positive growth impulses. We've been talking about inflation, but of course the data picture heading into the Jackson Hole conference, which is at the end of this week, and we'll talk in a second about what we think advisors ought to be paying attention to and comments there.

But the data's been mixed and I wonder if you guys could maybe elaborate a little bit on what we've seen just in the last four to six weeks because we're starting to see that come up in the headlines, in the commentary a little bit, in a more nuanced fashion over the last days and weeks. So maybe talk about a few of those numbers we've seen in the last little while.

PRAMOL DHAWAN: Yeah. Look, I think mix is the right word. I mean, there's something for everybody in the data sets. And it’s sort of that …

GREG HALL: It can fit to your argument.

PRAMOL DHAWAN: You can fit it to your argument. And you know, I think it validates a more sort of cautious approach, a wait and see approach, because we don't know how much of this is supply side driven and how much of this is truly transitory and in the…

GREG HALL: This is the inflation side of things.

PRAMOL DHAWAN: The inflation side of things.

GREG HALL: CPI and PCE. Yeah.

PRAMOL DHAWAN: Yeah. Correct. And we've sort of spoken about this. Our colleague Tiffany has spoken about this pretty extensively. And look, the economy is going through multiple supply side shocks. I mean, we've had four in the last five years. And to an extent, sometimes prices are just permanently, and sometimes they are more transitory.

So, it sort of behooves a little bit more of a cautious wait and see type approach. But yeah, I think, look, you're right. We spoke about it in our last podcast that the sort of quadrant math analysis, you know, we think still that in three states of the world, you can do very well within sort of fixed income and the convexity argument kicks in and in one state of the world that you don't, and that's the sort of state of the world that we've been internalizing right now, which is what everything that Marc sort of said and is well known in the market.

So, look, I think there is two-way risk everywhere. The data's far from uniformly positive. Global growth has held up well. But there are mixed pictures on inflation and reasons to feel a little bit more sort of cautious at the margin.

GREG HALL: And Marc, you mentioned even as we started talking, that you felt like our internal view was probably a little more dovish than at least some of the hawkish voices on the FOMC. Do jobs factor into that as well?

MARC SEIDNER: Yeah, I mean, I think we generally recognize the strength of the upper arc of the K-shaped economy. I think many of us that are in the weeds looking at, you know, consumer related debt and other data and statistics worry quite a bit about the lower arc of the K-shaped economy. And we had jobs report a few weeks ago that was, I would say decidedly weak.

I mean, consensus was for 80,000 jobs to be created, the number came in at minus 20,000. And revisions from the previous two months were combined minus another 100,000. And so that's 200,000 jobs that we thought we had that we don't really have. And that kind of matters. Interestingly, and this is way too much now casting, but consumer confidence came out today. Consumer confidence right now rests as low as it did during COVID.

So, the last time 30-year yields were this high, which was pre-COVID, consumer confidence was 130, whatever that means. Now it's 89. And so just put that in context, right? And there's a political dynamic there, and there's a hall of mirrors or a feedback mechanism for sure. But again, we're not talking about, you know, plus or minus a few points.

We're talking about, you know, confidence that is as low as it was during the COVID period, where term premium wasn't positive 1 percent, it was minus 1 percent. And I think that speaks to the repricing in yields in what is an increasingly unclear macroeconomic outlook. And again, I don't think PIMCO's, I don't think any of us are saying, hey, bond yields should, you know, 30-year Treasuries should yield 2 percent or 1 percent or 3 percent.

Where we were at a period earlier this decade, I think we're just saying that, you know, there's enough uncertainty, there's enough term premia or risk premia, and there are enough scenarios where you do really well as bond investors that we shouldn't get all emotional and worked up about being at the top end of the range.

GREG HALL: And of course, all of these topics will be of extreme interest to Fed Chairman Warsh as he prepares to make his remarks at the Jackson Hole Conference later this week. That he's scheduled to take the stage at 10:00 AM on Friday. Given the recent market volatility, no doubt, lots of eyes, perhaps more than usual, on the chairman Warsh as he makes this presentation. What do you think you guys will be listening for in particular? What, what would you like to hear? What do you expect to hear? What do you think would be most conducive for markets at this point?

SEIDNER: Well, I think it's probably, both Pramol and I lunged at the microphone at the same time. So we probably, you know, I would hope, and I would expect that he would use the opportunity, or the Chairman Warsh use the opportunity on Friday to maybe clarify some of the uncertainty that was left after the July FOMC meeting press conference, would add some clarity to the work that his five committees are doing, assessing, you know, how the Fed does things and what they do and when they do it, and what they watch, add some, you know, sort of add a, you know, give the markets an update on where that stands and some of the work that's being done.

And I think it would be helpful if he were to use this as an opportunity to not provide forward guidance, not tell us what he's looking at or what he's gonna do, but just give us a sense of the type of information that he values and perhaps, you know, a slightly longer-term, not meeting-to-meeting, but a slightly longer-term perspective of his view of the world.

GREG HALL: All right. Well, this has been fantastic. I'm glad we were able to grab you guys for half an hour. So everybody can timestamp our, the data we've used, the predictions that we've made or not made and use that to keep us honest and accountable in the future.

We will all be tuning in on Friday, despite the fact that it's late August. We'll want to hear what Chairman Warsh has to say. We'll, of course, look forward to having you guys back here to speak to us again sometime in the fall or sooner, Mark, if we get our wish and, or not our wish that, that, you know, volatility continues and you got more things to talk about with us.

But in the meantime, again, thank you both. And for those of you listening, I hope you found this useful. We thought it'd be a nice way to send you into the late summer weekends and Labor Day. Hope that that is a wonderful and relaxing and restorative time for you and your families. And we are very much looking forward to a busy and active fall and remainder of 2026.

It certainly hasn't disappointed on the interest level so far. If you've enjoyed anything you've heard today, please do visit us in the US at pimco.com. If you identify yourself as a financial advisor, you'll be taken to Advisor Forum. That is our one-stop shop for you to retrieve anything you want to read of PIMCO's, to do so efficiently and practically and then get on with your day serving your clients as effectively as you can.

As a reminder, Mark's and Pramol's piece publishes under the brand name PIMCO Perspectives. You can find this piece as well as there are other columns there. We referenced Tiffany in the podcast today. Tiffany Wilding is our senior economist, publishes a piece called Macro Signposts every Wednesday, if I'm not mistaken, which is a great read and a great way to stay up on all things macro in the world. And with that, we will see you next time.