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This paper examines the determinants of long-term bond yields through a panel data analysis of forward rates in 10 developed countries. We confirm that in addition to inflation expectations and the labor productivity growth rate, which influences the natural rate of interest, fiscal conditions, foreign borrowing, and demographics significantly influence long-term yields. The following are our main findings. First, for fiscal conditions, stock variables have greater explanatory power than a flow variable (primary balance). For stock variables, net government debt has greater explanatory power than gross government debt. Second, for foreign borrowing, net foreign debt, a stock variable, has greater explanatory power than current account balance, a flow variable. When an increase in government debt is financed entirely by borrowing from external sources, the increase in the forward rate is approximately twice that when financed domestically. Third, aging contributes to lowering yields. This appears to reflect elderly people's strong demand for financial assets, particularly for safety assets. Using the parameter values estimated by the panel data analysis, we decompose the forward rates of Japan and the US into the contributions of each independent variable. In Japan, while the increase in government debt has exerted upward pressure on yields, the outlook for rapid aging resulting from the retirement of baby boomers and the increase in net foreign assets have contributed to lowering yields. In the US, since 2000, aging resulting from the retirement of baby boomers has been reflected in bond prices, which has exerted downward pressure on yields.
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