The Stem Beneath the Flower

I visited a lotus silk farm on the outskirts of Siem Reap in Cambodia, and the visit taught me that most of what I thought I knew about the plant was wrong. Most of us picture a lotus and think of a waterlily, or, in my case, the brand that sells those Biscoff biscuits. In fact, a lotus is less like a flower, but a single plant that can be taken apart into a dozen commodities: the rare fibre drawn from its stem; vegan leather made with cornstarch and oil; seed bracelets; incense; tea; soap. Nothing is wasted. What was most interesting was that the lotus does not float; it is supported by a stem.

Unlike a waterlily, the lotus blooms above the surface, held only by its stem. I learnt this in the middle of the sharpest sell-off in global bond markets in nearly two decades. Long-term borrowing costs has hit major highs across developed markets, climbing to levels not seen since 2007. The 30-year US Treasury yield reached 5.33% on August 18th but today is at 5.19%, compared to the start of last month where it sat below 5%. In the UK, the 30-year gilt climbed to 5.78% while Japan’s 30-year yields rose to 4.00%, close to record highs. The move is notable not because the figure is high, but because it is concentrated on the long end, so the curve is steepening. The question is not why yields are rising, but rather, what has been holding the long end up for the past two decades, and whether anything can replace it.

For almost two decades, the long end of the yield curve seemed to behave like a waterlily people mistake the lotus for. It was propped up by quantitative easing, Japan’s yield curve control, price-insensitive central bank balance sheets, and pension funds with demand for duration. The long end never really had to carry its own weight because there was always something holding it up, but now that support is being withdrawn, and markets are finding out how thick a stem the long end actually needs.

The Stem

No single credit event has triggered this bond sell-off, nor a global shock, it is a combination, a build-up, over the course of several years that is now being reflected in the price of long-duration debt.

Government deficits have been climbing, with issuance leaning towards more long-dated sovereign debt, the US government debt stands at 122.6% of GDP, the UK is at 94.9% and Japan with 245%. These rising levels of debt burdens have become harder to finance in a persistent inflationary environment. The issue is, therefore, not the level of debt but the price investors demand for holding them. Term premium is the price of the stem length, the longer the claim, the more uncertainty an investor carries about inflation, fiscal policy, economic growth and the supply of debt. So, the stem must grow, and nothing is helping it.

Another source of duration is competing for the same buyers; the AI capex cycle is increasingly relying on debt markets to finance AI investment, adding further pressure to yields, with Barclays expecting total IG issuance to hit $1.9tn in 2026, up from last year’s $1.44tn. AI hasn’t alone caused the bond sell-off, but governments are now competing for capital with companies issuing debt at a scale with no recent precedent.

The traditional marginal buyers have also changed. Pension funds bought duration to match liabilities whereas the marginal buyers today buy because the price is right. Hedge funds alone account for 8.5% of privately-held US Treasury holdings, more than China, Japan and Saudi Arabia’s official holdings combined. This exposure is highly leveraged and principally sits in the cash-futures basis trade.

March 2020 highlights a time when hedge funds were forced to sell into a market that had no buyers left. However, April 2025 is more instructive. Yields were extremely volatile following tariff announcements, yet positions held because borrowing remained cheap and available. That is not a feature of the trade but a favourable environment that helped markets survive, and cheap funding is the first thing a sustained sell-off takes away. The stem is now longer than what it used to be and is now being held up by investors who are leveraged to hold it.

What Happens to the Flower?

The obvious question is whether the stem is a reliable structure, and whether markets can absorb a larger supply of government and corporate debt, without the long end continuing to reprice higher. It probably can, but at a price. Higher yields act as incentives for new buyers to enter, and if these yields stabilise, pension funds, insurers and asset managers will have a much more attractive starting point from which to rebuild duration exposure, whereas price-sensitive investors can step in when relative value becomes compelling. A 30-year JGB at 4.00% means Japanese insurers and pension funds no longer need to leave home to find yield, that withdraws a structural bid from Treasuries and gilts, and it is self-reinforcing because the higher JGB yields go, the less Japanese money there is to hold anyone else’s long end.

Though a lower policy rate may seem favourable to fix this, it may not succeed in doing so. The Fed held rates at 3.5 to 3.75% at its most recent meeting, which is in line with market expectations. Even if the Fed eventually eases, the front end reflects monetary policy, whereas the long end prices in supply and inflation uncertainty. So, the curve can still steepen despite easing.

The Stem Beneath the Flower

Back at the Lotus farm, the most striking part was not the flower but just how much it depended on the stem. The entire ecosystem of produce depended on the same underlying structure to grow.

This is what makes bond markets so interesting. For years, investors had access to cheap and abundant duration without having to consider the structures supporting it, the stem was there but relatively invisible. However, the water is draining and what’s left is the exposed stem, which has to be longer and thicker than what the last twenty years required.

Governments continue to issue debt; companies are borrowing to finance the AI boom and traditional long-duration buyers are becoming less dominant, whilst more price-sensitive and leveraged investors are taking their place. Inflation uncertainty means that investors are asking to be paid more to carry duration into the future. The stem can strengthen, but not in the same environment as before, and it cannot support the flower at the same price. Markets are now discovering what it costs to keep it standing.