The Skinny On...

We are reeling from a whirlwind 48 hours in NYC for the Industry Season 4 premiere! Tons of exclusive content to share with you next week. But for now, we’re talking about the big structural shifts that have massive implications for the global bond markets. 2026 is off to a great start, LFG.

— Jen & Kristen

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Saying “So Long!” to the Long End?

Global bond markets are repricing in response to structural changes that you may not understand…or, in some cases, ever even heard about. But I cannot stress enough how important it is for EVERYONE to understand what’s going on in the bond market. These markets impact not only what happens in other markets like equities and FX, but also broader geopolitical movements that drive the splashier headlines that make the front pages.

For most of the past decade, the long end of sovereign bond markets have been…boring? Easy to ignore? Between the US and Europe, interest rates on bonds with longer maturities (think 10-30 years) had been drifting lower. The same group of players consistently dominated the flows, and volatility was relatively low. I know I certainly had trouble trying to convince my non-rates partner Kristen to care much about it…UNTIL the tariff panic of last spring kicked off an identity crisis in the long end that is potentially reaching a fever pitch.

But let’s back up a step.

In order to understand what’s going on today, we need to establish first principles. If you didn’t grow up in the rates markets, or if you’ve only ever dabbled in general bond indices, a reminder that we talk about the bond market being comprised of a “yield curve”. It’s a graph whose x axis is the maturity of our bonds, and whose y axis is the corresponding interest rate, like this:

And when we talk about yield curves “steepening”, we are talking about the slope of that curve increasing.

Yield curves “flattening” means the slope of that curve is decreasing.

All else being equal, a theoretical yield curve is upward sloping, as shown above. Why? Because investors theoretically demand higher interest rates to compensate them for tying up their money for longer.

Beyond that, a given country’s sovereign debt yield curve gives us a projection of the market’s expectations for growth, inflation, monetary policy path, risk, and overall uncertainty. When it is upward sloping, not only is the market expecting that rates will be higher in the future, but also demanding compensation due to increased perceived risk or trepidation around tying up money that far into the future.

So when we talk about term premium, we’re asking: “how much do I as an investor need to be paid today for future uncertainty? What are the risks that inflation, growth, fiscal policy, and monetary policy evolve in ways that are unfavorable for my return over a 20 or 30 year horizon?”

And to make it even simpler, interest rates in the long end are driven by the same things that drive ALL markets: supply and demand.

On the supply side, governments have been steadily increasing long end issuance to fund burgeoning deficits. All else being equal, more supply should mean lower prices, higher yields. 

But there’s been a pretty steady stream of buyers historically to absorb that supply.

Who typically buys these long dated bonds? Well, you’ve got your classic “fixed income” investors in the truest sense of the word: retirees who no longer earn income from a job, and want to live off of a steady stream of cash flows from their investments.

But there is also a large structural institutional buyer of the long end that has been a steady source of demand as long as I can remember: pension funds and insurance companies. 

Why do they need to buy long dated bonds? Well, think about the business model of one of these institutions. They have incoming cash flows TODAY: short term assets in the form of insurance premia or pension fund contributions from the workforce. And they have outgoing cash flows in the DISTANT FUTURE: long term liabilities in the form of insurance payouts (i.e., your life insurance policy) or pension payouts (i.e., the money you receive from your pension when you stop working).

And we all know the basic concept of the time value of money: money in the future is worth less than money today. These institutions get money in the door today that they need to make GROW to pay out in the distant future. 

We’ve talked often about how these institutions invest in illiquid private equity and private credit funds with a 10 year horizon. But we haven’t really touched on the fact that they are also historically some of the biggest buyers in the long end of the yield curve for this exact reason. They buy long bonds to shore up that asset/liability mismatch, putting downward pressure on long end yields. And when their portfolios require a large rebalancing — meaning, potentially a sale of bonds — that can be a shock to the system in the OPPOSITE direction.

So that brings us to the big development in question.

The Netherlands has announced the most massive overhaul of its pension system in its history under the Future Pensions Act. The TLDR: it will replace traditional defined-benefit pension structures with a collective defined contribution model.

What’s the difference? A defined benefit plan guarantees a predetermined payout in the future. This means that the sponsor bears the investment and longevity risk and has a strong incentive to hedge their long-term liabilities with long duration investments. A collective defined contribution plan pools assets, but links benefits to investment performance rather than guarantees. You can think of defined benefit as an “old school” pension plan in the US where, say, a firefighter or a teacher is guaranteed a fixed salary every year after they retire, no matter what. A defined contribution plan is akin to your 401k, where your retirement payout is determined by the performance of whatever YOU decide to invest.

What does this mean? 

1. The switch shifts the payout risk to plan participants rather than the sponsor, and

2. It reduces the structural need to hedge long-dated interest rate risk.

Essentially, it means these buyers who had once been a sure thing in the long end of the bond market…are going away. Estimates from central banks and market reports suggest Dutch pension funds could be effectively sellers of EUR100-150bn worth of long end duration. The time frame could be anywhere from 6 months to 2 years. 

The impact of this structural shift has already been visible in terms of a steepening of European yield curves.

What’s more, Germany recently announced the introduction of 20 year bond issuance to fund higher projected spending. The 20 year bond in the US has been so unpopular that it typically trades cheap to (meaning, at a higher yield than) the 30 year bond. It’s hard to see who is going to step up and support the long end of these yield curves with one of the biggest structural buyers bowing out.

So, what does this mean for U.S. rates? Everyone’s in consensus that steepeners are the play with high likelihood of a dovish Fed this spring. And long end issuance in the U.S. certainly isn’t letting up anytime soon. If long end buyer boycotts bleed into the U.S., that is certainly supportive of a steeper yield curve as well. But they may be facing off against a more activist central bank as Powell’s successor at the Fed emerges. Nothing is certain, and I wouldn’t consider a bear steepening of the U.S. yield curve a done deal by any means.