What’s wrong with long-end bonds?

Long-end bond yields are rising primarily because the combination of fiscal and monetary policy is generating excess demand and inflation, rather than because investors are pricing an imminent sovereign credit crisis.

• US long-end yields are rising less than short-end yields, Treasuries are outperforming swaps and international peers, and US sovereign CDS have fallen in recent weeks, which is inconsistent with a rise driven by US default risk.
• Supply capacity has been constrained by shocks including the Middle East conflict, while AI infrastructure and “old economy” investment have created exceptionally strong private-sector demand.
• The energy disruption began with the Iran war in February 2026; restoring energy flows toward pre-war levels would reduce supply constraints and the amount of monetary or fiscal tightening required.
• The authors argue that the Fed must restore credibility around its 2% inflation target and estimate that an adjustment cycle of 2–3 rate hikes could be sufficient, potentially flattening the curve and lowering yields at longer maturities.
• A sharp slowdown in AI infrastructure capital expenditure could relieve pressure on sovereign yields, but internal experts and AI-sector earnings outlooks do not suggest this is likely in the near term.
• Treasury buybacks and shifting issuance toward short-term bills could buy time but would not solve the underlying problem; durable relief would require fiscal consolidation, which appears unlikely soon in the US, while Japan is moving toward stimulus and Germany pursued stimulus last year.

Takeaway: Long-duration bonds remain vulnerable while fiscal policy is loose, inflation is above target and private investment demand is strong; a durable rally would require an energy shock reversal, credible Fed tightening or, most importantly, fiscal restraint.