Muhammad Qubbaj, co-head of North America Interest Rate Product Sales and Trading at Goldman Sachs FICC and Equities, stated that “the pieces are in place” for a sustained shift in global 10-year and 30-year yields. As of early September, 30-year US Treasury yields were trading around 5.7%, marking the highest levels since 2002. Other sources within the firm cited figures of approximately 5.2% as of September 8, indicating a rapid and significant rise in borrowing costs for the longest-dated US debt. Similar trends are observed globally: German 30-year yields have reached their highest levels since 2009, while Japanese and UK yields have hit their highs for this century.
Goldman Sachs identifies three primary drivers behind this yield expansion. First, fiscal deficits in developed economies have grown substantially since the pandemic. In the US, annual deficits are running at roughly 6% to 7% of GDP. While this sounds alarming, Qubbaj contextualizes the risk by noting that nominal GDP growth is also hovering around 6%. Consequently, the deterioration in the debt-to-GDP ratio is closer to 1% per year—a “drift, not a spiral,” he noted—yet it still represents a continuous increase in the supply of government bonds competing for limited global savings.
Second, there is a new and massive category of private borrowing: investment in AI. Goldman Sachs Research estimates that borrowing to fund AI infrastructure could amount to around 1% of global GDP. This surge in corporate issuance competes directly with government debt for the same pool of institutional capital, further straining demand for bonds. Qubbaj observed that investors are cautious about locking in long-term duration when rates could move higher, particularly amid heavy issuance from both the US government and other sovereign borrowers.
Third, energy prices remain a critical factor. The conflict in Iran has pushed oil prices higher this year, and Goldman Sachs expects this inflationary pass-through to other products to continue even if crude prices stabilize. George Cole, head of European rates strategy at Goldman Sachs, noted that while worries about energy-driven inflation may decline in the next six months as visibility into AI returns improves, the fiscal concerns will not disappear. “What won’t go away is the fiscal concerns,” Cole said.
The role of the Federal Reserve in this environment has also evolved. The September 15-16 FOMC meeting resulted in a consensus decision to hike rates, with a second hike likely in October or December. Qubbaj emphasized that the Fed’s communication was clear: the rate increases are intended to remove accommodation rather than restrict the economy. “They don’t really think this is restrictive territory,” Qubbaj said. Crucially, the Fed has formally separated the front end of the yield curve from the long end. “The Fed was very clear—it’s not going to police the long bond,” Qubbaj added. This implies that hikes in the short-term policy rate will not automatically create a bid for 30-year Treasuries. Instead, the level of long-term yields will be set by the demand of large institutional investors, such as pensions and insurers, who require a yield attractive enough to offset the risk of holding long-duration assets.
Market reactions to the Fed’s stance have been orderly. Cole highlighted that the rise in yields has been accompanied by a lack of volatility spikes, suggesting the market is pricing in fundamental shifts rather than speculative froth. “The lack of a move higher in volatility makes it hard to claim that we’re fundamentally mispriced,” Cole said. He added that if fundamentals have driven yields higher, only a shift in those fundamentals can bring them down.
Governments have attempted to manage this supply-demand imbalance. The US Treasury announced plans to increase buybacks of Treasuries maturing in 10 years or more, effectively reducing the average maturity of debt issuance. Similar measures have been taken by the UK and Japan. However, Goldman Sachs analysts, including Cole and William Marshall, head of US rates strategy, argue that these issuance adjustments are “an effective reduction in the average maturity of issuance” but are insufficient to change the broader macro price of yields. “It’s not a criticism to say that this isn’t going to change the macro price of yields,” Cole noted, describing such measures as consistent with the macro environment but not transformative.
For borrowers and investors, the implication is that the cost of long-term capital will remain elevated. The convergence of higher policy rates, demand for compensation for holding long-term debt, and uncertainty over debt absorption capacity creates a persistent floor under yields. While the immediate impact of energy shocks may fade, the structural increase in global debt issuance from both public and private sectors suggests that the era of low long-term interest rates is ending. The next critical test for these levels will come as markets digest the timing of the Fed’s final hike this year and as new data on fiscal trajectories and AI investment returns becomes available.
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