US Bond Yields Hit Two-Decade Highs as Experts Warn of Market Pressures

The yield on US government long-term bonds is hovering at levels not seen in nearly two decades. Ten-year notes currently yield 5.25%, after crossing the 5.3% threshold, with some warning that the markets are on the brink of a crisis.

Zvi Stepak, founder and owner of Meitav Investment House and a veteran of the local capital market, notes that this phenomenon is not limited to America. In Britain, the 10-year yield stands at 5.4%, in France at 4.9%, in Germany at 3.5%, and in Japan—where yields were negative for years—at 3.1%. Israel has also seen rising yields recently, reaching 4.2% despite falling domestic inflation.

The US Situation and Global Pressures

Stepak is particularly troubled by the picture in the United States. While inflation has not risen significantly in recent months, it is viewed as "sticky," raising fears of further interest rate hikes. Federal Reserve Chair Kevin Warsh is seen by the market as someone who is not deterred by rate hikes and is less in favor of aggressive Fed intervention.

"We saw this last week when weak employment data was published. Such data should have made rate hikes unnecessary, but bonds barely reacted. Their prices should have risen and yields fallen, but that didn't really happen. In other words, not only is inflation sticky, but yields are sticky too," Stepak says.

He points to several reasons for these high yields, starting with the debt-to-GDP ratio in the US, which has reached around 120%, while Israel worries about crossing 70%. Additionally, foreign investors are reducing their holdings. Calculations by Meitav Chief Economist Alex Zhebzhinski indicate that foreign ownership of US Treasury bonds has dropped from 60% to 40%, largely driven by China and Japan.

Investment Strategies Amid Bond Market Volatility

When asked if it is advisable to buy US bonds today, Stepak suggests that a localized investor looking to diversify currency exposure can lock in 5.25% for a decade—levels last seen in 2007 just before the global financial crisis. However, for those avoiding dollar exposure, hedging costs of around 2% reduce the net return significantly, making Israeli government bonds yielding 4.22% more attractive locally.

For those wishing to acquire US bonds, Stepak advises a phased approach:

Gradual Acquisition: Purchase bonds in stages according to portfolio currency exposure limits.
Reducing Equity Exposure: Given the risk that a bond market crisis could spill over into stocks, moderately trimming equity holdings is recommended.
The Double Return: Investors buying US bonds at a 5.2% yield can potentially benefit from Wall Street downturns that weaken the shekel, while still securing attractive fixed returns.