News & Insights

Long End of the Yield Curve Rises

Bond yields at the long end of the curve have been trending upwards in recent months, driven by concerns over fiscal stability rather than inflation. The initial spike in yields followed tariff-related announcements, but recently increases have occurred without meaningful changes in trade policy, suggesting that investors are concerned with mounting debt levels.

The steepening of the yield curve, especially the rise in the 20-year relative to shorter maturities, has created a larger-term premium. Investors are demanding greater compensation for holding longer-duration debt, reflecting greater unease with long-term fiscal risks. Recent Treasury auctions, particularly for longer-dated maturities, have also shown signs of weakness, prompting the Treasury Department to initiate buybacks aimed at bolstering liquidity.

Rising long-bond yields are not just a U.S. phenomenon, with yields rising in other countries that have large budget deficits or worse-than-expected fiscal outcomes. An increasing number of countries have adopted budgets that create deficits, which are accumulating into unsustainable debt levels. Investors are expressing concern by demanding higher yields to continue buying the increasing volume of government debt.

Perhaps nowhere is this problem more acute than in Japan, where a recent 20-year bond auction recorded the weakest demand since 1987. Yields there have jumped 100 basis points since January 2024, driven by both reduced demand and the challenge of absorbing large amounts of new debt issuance. The 40-year bond has lost more than 20% over a similar timeframe. This weakness is spilling over into other global bond markets, contributing to rising yields. As sovereign fiscal concerns intensify worldwide, markets are demanding higher returns to absorb growing debt levels, amplifying volatility across the yield curve.

Rising Term Premium Shows Investors are Asking for More to Compensate for Higher Long-Term Risk

Source: Bloomberg

10 Year Bond Yields of Developed Countries

Source: Bloomberg

Irregular Jobs Data Belies ‘Learn to Code’

While current government reports of a cooling job market are not yet alarming, the actual state of today’s job market may be of greater concern given recent downward revisions of last year’s jobs data. Initial job numbers have overstated job growth, causing substantial downward revisions as they are finalized.

Final numbers for the nonfarm payrolls for the third quarter of 2024 grew by only 0.7% on an annualized basis, below the “final” estimate of 1% growth. This had already been subject to a downward revision by 111,000 jobs from the initial estimates. Even more troubling, the reliable Business Employment Dynamics survey shows a net loss of 1,000 jobs for that quarter. This overreporting of initial job gains has become quite glaring since the pandemic, and it is unclear why. Many theories have been proposed, from staff shortages and difficulties assessing a post-pandemic workforce, to more nefarious political motivations. One thing is clear: The response rate to the survey plunged during the COVID pandemic and has not rebounded since, making the data much less reliable.

While the topline unemployment rate has remained stable, the unemployment rate for new graduates is rising, with the gap between those with and without a bachelor’s degree narrowing. Job prospects are deteriorating, especially for recent college graduates. The sector suffering the worst fate is “professional, scientific, and technical services.” These industries are the prime adopters of artificial intelligence services, so these new tools are out-competing young and educated entrants into the labor force. Employment prospects for grads in areas not competing with AI have grown.

It's too soon to tell if the recent prediction of AI developer Anthropic’s CEO that AI could eliminate 50% of entry-level professional jobs within the next one to five years will come to fruition, but there is clearly a demand and supply mismatch in certain fields already. Underemployment may be a condition for recent grads, even if the broader labor market remains strong, as they grapple with rapidly accelerating improvement in AI.

2023 and 2024 Payrolls Revised Down

Source: Bloomberg Finance LP

Employment of New Graduates

Source: Oxford Economics/IPUMS

Unemployment Rates by Education

Source: Oxford Economics/IPUMS

Rising Debt May Be Cushioned by Higher Incomes

Delinquency rates on auto loans, unsecured debt and student loans have ticked up significantly. Auto loan defaults are approaching their 2010 and 2020 peaks and consumer credit defaults are nearing the levels of the 2008 financial crisis. Cushioned by high prices, defaults on home mortgages, which account for more than half of total consumer debt, remain very low but are rising. Newer and FHA insured mortgages are affected by high mortgage rates and high home prices. Buyers who made small down payments face a disincentive to stay current on their mortgage as home values peak. One optimistic sign is that while the total number of balances currently in default is increasing, the number that transitioned into default status in the most recent quarter has leveled off for credit cards and auto loans.

Last year’s end of student loan forbearance has now annualized the one-year grace period, pushing many of these loans into default, with the delinquency rate jumping to nearly 8%. This may understate the situation as many student loan borrowers remain exempt from repayment. Among student loan borrowers in repayment, the default rate is closer to 24%. While 57% of these delinquent borrowers already had a credit score below 620, another 36% with credit scores of 620 to 719 saw an average drop of 140 points, and those above 719 saw their scores fall 177 points. This is going to hurt their chances of starting families and buying first homes.

While deteriorating consumer credit conditions for some borrowers may inhibit spending, other ways of borrowing are picking up some of the consumer slack. Buy-now-pay-later (BNPL) services have exploded in popularity, with a Lending Tree survey of consumers finding that nearly half have used one of these services. This same survey revealed that a rising number of BNPL users were late in making payments, though credit loss rates at Klarna, one of the largest BNPL services, remain very low and stable.

Despite rising consumer default rates, households overall remain in decent shape with personal income seeing strong gains, consumer spending expectations ticking up and a healthy personal savings rate providing a solid cushion even as inflation concerns persist. Initial jobless claims also remain low, and corporate America seems to be brushing off policy uncertainty and tariff fears, with little sign of widespread layoffs.

Percent Of Credit Balances for Households In Default (90+ Days Delinquent)

Source: Bloomberg Finance LP

Student Debt by Share of Delinquencies (All Borrowers On Left, Those Only In Repayment On Right)

Source: New York Fed Consumer Credit Panel/Equifax

Buy Now, Pay Later Loan Popularity Among Consumers

Source: LendingTree survey of 2,006 consumers, conducted in April 2025

Key Market Indices Performance

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