Pension Demand Decline Fuels Surge in Long-Term Yields, Challenging Governments

In September 2025, concerns about unsustainable government borrowing are evident in various financial markets, from the anxiety around gilts to the surge in gold prices. However, these concerns are not being reflected in the broader bond market, where the real action is concentrated in the 30-year bond yields.

The recent moves in the bond market are not a broad-based "rout," but rather a technical adjustment specific to the longer-dated issues. While the concerns about rising inflation and increased government debt issuance are genuine, they do not appear to be the primary drivers of the price action. Instead, the most significant yield moves are occurring in jurisdictions where once-dominant pension and insurance demand for long-dated bonds has waned.

As populations pass their peak savings age, these institutional investors have less need for long-term assets, leading to a decline in demand for 30-year government bonds. This shift has been compounded in some cases, such as the Netherlands, where legislation is forcing existing pension schemes to change their investment strategies.

Governments are facing a challenging situation, as they are reluctant to shorten the average maturity of their debt to alleviate the pressure on the long-end of the yield curve. This is because they want to manage their risk exposure and avoid seeing their debt profiles become alarmingly short, as is the case in the United States.

While further underperformance in long-dated bonds seems likely, investors may be better off exploring "steepener" trades on the gap between shorter and longer-term yields, or expressing their views on fiscal unsustainability or political instability through currencies or gold, rather than simply shorting long bonds.