Treasuries near 5.24% lift discount rates and reset how plan sponsors value liabilities
Canada's 10-year bond yield reached 3.99 percent on September 2, the highest since November 2023, while benchmark 10-year US Treasury yields held near 5.24 percent on Wednesday, their highest since 2007.
Reuters put the US monthly move at close to 50 basis points, the largest in about two years, with global government bonds set for their worst month in years.
Aon reported that in the quarter ended June 30, 2026, long-term Government of Canada yields rose 33 basis points, lifting the discount rate 24 basis points to 4.67 percent and the aggregate funded ratio of S&P/TSX-linked plans to 116.7 percent from 111.4 percent.
For banks, insurers and pension funds, Reuters reported, a fast rise in yields erodes the market value of existing long-dated bonds, and institutions forced to sell before maturity can lock in losses even though the securities repay face value if held to term.
Coverage of Treasury volatility jumping as yields hit a 19-year high recorded the Milliman 100 index at 112.2 percent funded as of August 31, a figure that predates the September selloff.
Deteriorating government finances, a glut of issuance and rising inflation drove the move, according to Reuters, with the seven-month-old US-Israeli war on Iran keeping energy costs elevated.
CNBC reported the 30-year US Treasury bond yield at 5.585 percent onTuesday, its highest since June 2002.
"I do think we are moving towards a structurally higher-yield regime," Charu Chanana, chief investment strategist at Saxo, told Reuters, adding that the hurdle for yields to return to post-Global Financial Crisis levels now looks much higher.
PIMCO managing director and multi-asset credit strategist Lotfi Karoui argued in a paper dated September 15 that debt-funded artificial intelligence capital expenditure is not crowding out the US$32tn Treasury market.
Karoui tested six surprise AI-related debt deals over the preceding 12 months against two-day moves in 10-year US Treasury yields, the estimated 10-year term premium and 10-year swap spreads, and found no statistically significant response across any of the three.
The roughly US$1tn in hyperscaler capital expenditure expected this year consumes the same real resources whether funded with debt, retained earnings or equity issuance, Karoui wrote, though the build-out can still lift equilibrium real rates through the saving-investment channel.
Reuters put hyperscaler bond sales this year at more than US$200bn, citing LSEG data, more than double the prior year.
Sean Peche, founder and portfolio manager at Ranmore Fund Management in Woking, England, wrote in commentary provided to Benefits and Pensions Monitor that US long-term rates have risen from below 2 percent in 2020 and 2021 to 5.2 percent, the highest in 19 years, and that 20-year Japanese government bond yields have gone from around 0.5 percent to 3.8 percent.
A risk-free 5 percent from long-term US government bonds, or a 2.4 percent real yield from a 10-year US inflation-linked bond, makes a 1 percent dividend yield on the S&P 500 look relatively less attractive, Peche wrote, with US operating margins and valuations already at high levels.
Canadian defined benefit plans posted a 6 percent second-quarter gain, with fixed income returning 3 percent against 2 percent for the FTSE Canada Universe Bond Index, according to RBC.
