Investors now demand more than 5% to lend to the US Government for 30 years

Something unusual is happening in the world's most important bond market.

Investors now demand more than 5% a year to lend money to the US Government for 30 years, with the 30-year Treasury yield recently reaching its highest level in almost two decades.

A Treasury bond is simply an IOU issued by the US Government. An investor lends the government money and, in return, receives regular interest payments before getting the bond's face value back when it matures.

The yield tells us the return an investor can earn by buying that bond at its current market price and holding it to maturity.

The important part is that bond prices and yields move in opposite directions.

Imagine a bond paying $40 a year. If investors are willing to pay $1,000 for it, that payment represents 4%. But if investors become less enthusiastic and will pay only $800, the same fixed $40 payment represents 5% of the purchase price. The full yield calculation also takes account of the eventual repayment of the bond's face value.

So when Treasury yields rise, the bond market is effectively saying: we will lend to you, but we want a better return.

Why are investors demanding more now?

Partly it reflects inflation. Higher oil prices and renewed inflation concerns increase the risk that dollars received decades from now will buy less than expected.

But government finances matter as well. US federal debt has exceeded $40 trillion, deficits remain extremely large and Washington must continually issue vast quantities of new debt. Greater supply means investors may require higher yields to absorb it.

There is also what economists call a term premium: extra compensation investors demand for locking their money away for decades while facing uncertainty about inflation, interest rates and government finances.

That is why the 30-year yield matters beyond America.

US Treasuries help set the global price of money. Higher Treasury yields can increase borrowing costs for companies, governments and banks around the world — including Australia.

The bond market's message is not that America cannot borrow.

It is that long-term borrowing is becoming more expensive.