BY JAMIE MCGEEVER
ORLANDO — In the faceoff between heavily indebted developed economies and increasingly wary investors, Japan has blinked first, announcing that it will reconsider its debt profile strategy amid plunging demand for long-dated bonds. The US could soon follow.
Japan has the second-longest debt maturity profile of the G7 nations, with an average of around 9 years. Decades of ultra-low policy rates allowed Tokyo to borrow huge amounts at very low cost across the Japanese Government Bond yield curve.
But in recent weeks, 30- and 40-year yields have soared to record highs, as appetite for long-dated paper at JGB auctions has dried up, a one-two punch that has forced officials to consider reducing issuance of long-term bonds in favor of short-dated debt.
Many of the debt pressures bearing down on Tokyo are also being felt in Washington.
The US no longer boasts a triple-A credit rating, following the downgrade from Moody’s earlier this month, and the non-partisan Congressional Budget Office projects federal debt held by the public will rise to a record 118.5 percent of GDP over the next decade from 97.8 percent last year. Net interest payments will rise to 4.1 percent of GDP from 3.1 percent, it predicts.
Finally, there is Trump’s tax-cut bill, which is projected to lump $3.8 trillion onto the federal debt over the next decade, according to the CBO.
All this is creating understandable unease among investors, and even though foreign demand at bill auctions has remained high, on average, demand at bond auctions is the lowest in years. Treasury may be forced to grab a page out of Japan’s recent playbook and shorten its maturity profile.
The US has the shortest ‘weighted average maturity’ (WAM) of all G7 countries at 71.7 months, according to Treasury. That’s due to a mix of factors including rising deficits, Fed holdings of longer-dated bonds, and high liquidity and demand at the short end of the curve.
But this figure has rarely been higher on its own terms. While the WAM reached a record 75 months briefly in 2023 and was elevated during the post-pandemic period, it has otherwise rarely exceeded 70 months. Indeed, the average going back to 1980 is 61.3 months.
Shifts in Treasury’s WAM over the past half century have largely been driven by the interest rate environment, economic and financial crises and investor preference. While today’s mix of market, economic and geopolitical trends is unique, it doesn’t point to strengthening investor demand for long-dated bonds.
