The Subtle Shift: Why advanced-economy long-term sovereign bonds are repricing risk

Editor's note: Ge Lin is an CGTN economic commentator. The views expressed in this article are the author's own and do not necessarily reflect those of CGTN.

In recent trading, European long-term government yields are climbing to multi-year highs, running counter to expectations of imminent rate cuts. The seeming contradiction has prompted a wave of technical explanations. Some point to seasonal issuance and a crowded September supply calendar; others highlight mechanical drivers such as Dutch pension fund reallocations that are reducing exposure to long-dated sovereign bonds.

These short-term mechanics matter, and they do explain parts of the move. But the recent price action is better seen as a signal rather than noise: temporary frictions are amplifying deeper structural forces that are reshaping how investors view the safety and scarcity of long-term sovereign debt issued by core developed economies.

The real yield channel: fraying fiscal discipline and sovereign risk compensation

For decades, long-dated government bonds from the largest advanced economies anchored global portfolios as the ultimate "safe" assets. They offered investors not only liquidity and depth, but also the promise of predictable real value across decades. That status was never literally risk-free, but it rested on an implicit assumption: fiscal trajectories, while stretched at times, would remain broadly manageable over the long run. Today, that assumption is eroding, and the erosion is showing up in real yields.

The rise in long-term yields may signal a gradual shift: long-term sovereign bonds from advanced economies are being reclassified. They are increasingly seen as carrying risk-asset characteristics, with investors demanding higher compensation in response to doubts about fiscal discipline and sustainability.

Why has fiscal self-discipline become so hard to restore? The answer lies in both history and politics. Since the 2008 crisis, advanced economies have leaned heavily on fiscal expansion to stabilize shocks. Just as debt ratios began to plateau, the pandemic of 2020 triggered another surge, pushing debt-to-GDP levels into uncharted territory. That second wave of expansion occurred before the first wave was consolidated, leaving public balance sheets structurally heavier. Each new emergency — financial rescue, pandemic relief, defense rearmament, energy transition — adds another layer of commitments that are politically near-impossible to reverse.

This accumulation has created a shift in expectations. In earlier episodes, markets assumed that after periods of fiscal stimulus, governments would eventually consolidate, generating primary surpluses to stabilize debt. That expectation has faded. Investors now treat structural deficits as the norm, not the exception. What was once tolerated as "temporary" is now embedded as a baseline trajectory.

The political economy reinforces this drift. Electoral cycles privilege the short term: Leaders maximize near-term support through visible spending or tax cuts, while the costs are deferred into the future. In such systems, fiscal rules and consolidation pledges rarely survive the pressures of crisis management and voter demands. Few expect a decisive return to pre-crisis restraint. The rational expectation is that deficits will be a semi-permanent feature of the advanced-economy landscape.

Once markets internalize that outlook, the pricing of long bonds changes. When future issuance is expected to keep rising in an already high-rate environment, investors must ask whether such debt still preserves real value through time. The answer is increasingly cautious. In response, the term premium — the additional yield demanded for holding long maturities rather than rolling short ones— has risen meaningfully.

This is why real yields — not just nominal — have moved higher at the long end. Monetary easing expectations can lower the front end, but the back end is now tethered more tightly to fiscal fundamentals.

The nominal yield channel: Inflation expectation and Central Bank credibility

A second, equally important factor driving long-term government yields in advanced economies operates through nominal rates. Unlike the structural fiscal pressures that affect real yields, this channel works by lifting the expected inflation component embedded in long-term nominal yields.

Several sources contribute to this reassessment. First, fiscal indiscipline itself can generate inflationary pressure if markets perceive that deficits will ultimately be monetized. Central-bank credibility matters here: if monetary authorities appear to accommodate fiscal pressures, or if markets doubt the independence of the central bank, the risk of debt monetization — and hence future inflation — rises.

This underscores why central-bank credibility is far more than an abstract institutional goal. Credibility directly affects the cost of sovereign funding: a perceived erosion of independence forces investors to demand higher nominal yields today.

Second, inflationary pressures are not solely fiscal in origin. Global tariffs, supply-chain fragmentation, and energy cost shocks all add to the likelihood of higher price growth. Each of these elements can shift market expectations about the long-run inflation midpoint.

In addition, even if near-term rate cuts are expected, higher inflation expectations can imply that future rate hikes may still be necessary to curb inflation. Markets already incorporate this potential trajectory into current long-term yields. This creates a paradox in today's advanced-economy bond markets: long-term rate movements diverge from short-term rate expectations.

Consequences: The potential impact of long-term sovereign reclassification

If long-term sovereign bonds in advanced economies increasingly exhibit characteristics of risk assets rather than the traditional "safe" asset category, the conventional anchoring logic of global financial markets would be disrupted. Should this trend intensify in the future, and these bonds continue to be used as the primary reference point for asset pricing, the higher risk premium they command would, in turn, raise discount rates across other financial assets, potentially lowering valuations even if the fundamentals of those assets remain unchanged.

Alternatively, markets may shift toward a relative-pricing framework, rather than relying on long-term sovereign bonds as absolute anchors. In this scenario, valuations do not uniformly compress, but the scarcity of truly long-dated, liquid, low-risk assets becomes pronounced.

This scarcity would lead to several important implications:

First, portfolio construction becomes more challenging, as fewer reliable safe assets are available to balance duration, credit, and liquidity risks.

Second, the system's sensitivity to shocks increases: with fewer high-quality safe assets to seek refuge in during stress events, the financial system's overall buffer is reduced, making it more vulnerable to shocks.

Third, global capital allocation may pivot toward alternative "safe-like" instruments—such as short-term sovereigns, inflation-linked bonds, high-quality corporate debt, or high-quality sovereign bonds from non-advanced economies, most notably China—altering the composition of reserves and institutional portfolios.

Looking ahead: Adapting to a scarcer safe-asset world

While some of the recent rise in long-term European government yields could be attributed to technical factors, it may also indicate a more persistent shift in the implicit contract underpinning global portfolios — the assumption that advanced-economy long sovereigns are deep, liquid, and reliably safe — is under strain. This does not point to an immediate crisis, but it does suggest a potential shift toward a new market equilibrium.

Policymakers now face a choice: restore confidence in safety through credible fiscal repair, stronger institutions, and steadier political management, or let markets continue repricing long maturities in line with structural uncertainties. While the former appears less likely, the latter would have significant implications for asset valuations, portfolio allocations, and the resilience of the global financial system in a world where "absolutely safe" assets can no longer be taken for granted.