Government Borrowing Costs Surge, Intensifying Global Economic Pressures
Global Bond Market Selloff and Its Implications
By Kevin Buckland, Alun John, Rae Wee and Laura Matthews
TOKYO/LONDON/SINGAPORE/NEW YORK, Sept 1 (Reuters) - A selloff in global bond markets deepened on Tuesday, reflecting investor angst over inflation and government debt levels that stand to inflict fresh pain on consumers and businesses.
Rising Yields Across Major Economies
Japan's 10-year yield hit 3% for the first time since 1996 as the rout hit bond prices, driving up yields, in major economies around the globe. Yields hit their highest in 15 years in Germany and their highest since 2008 in the UK. In the U.S., the 10-year yield rose 3.8 basis points to 4.796%, putting it in range of its highest level since 2023.
Structural Debt Concerns
Some of the world's leading economies, notably the U.S., have sharply increased their debt loads in recent years through deficit spending, with the U.S. debt hitting $40 trillion - a shift investors warn is likely structural rather than episodic and will be difficult to remedy without tough choices at the national level. Meanwhile wars from Russia-Ukraine to the Middle East have sent oil and gas prices higher, adding to pressure on interest rates and the cost of living.
Domestic Drivers and Treasury Dynamics
“This is likely primarily a U.S.-specific story, though global currents are amplifying it," said David Krakauer, vice president of portfolio management at Mercer Advisors.
"The core drivers are largely domestic: deficit spending, the cost of servicing a rising debt load, and shifting Treasury auction dynamics," in which price-sensitive buyers such as hedge funds and other private firms have in part supplanted price-insensitive official buyers such as central banks.
Government and Market Responses
Policy Interventions and Market Jitters
Governments are jittery. The U.S. Treasury stepped into markets last month in a bid to cap a rise in borrowing costs, which can spill over to higher loan rates for everything from household mortgages to business loans. Yields on 30-year Treasuries are close to the highest in 19 years.
A deluge of bond sales from big tech companies aggressively raising money to fund the AI boom is adding to the pressure on bonds, as is the decision by Federal Reserve chief Kevin Warsh to limit his communication with markets, investors said.
"When the destination is unclear, repositioning is rational," said Krakauer. "So, some of what you’re seeing in longer-dated yields likely reflects markets pricing in a wider range of Fed outcomes rather than a single trajectory.”
Bond Market Pain: Related Stories
Here are some related stories on the surge in government bond yields, what's behind them and why investors and borrowers are worrying:
- - Under Pressure Tracking the pain in G7 government debt
- - What's behind the selloff in world bond markets?
- - EXPLAINER Why the bond market may be resetting expectations about the US
- - AI-driven surge in bond yields could be next risk for markets and growth
Inflation and Fiscal Worries
Energy Prices and Fiscal Deficits
INFLATION, FISCAL WORRIES
The scale of the global shift is underscored by the rise in 10-year Japanese government bond yields to 3% for the first time in 30 years, something seen as practically unthinkable until recently after over a decade of massive central bank debt purchases kept rates artificially low.
"The stalemate in the Middle East risks pushing energy prices higher. ... Meanwhile, few actions have been taken to consolidate fiscal deficits in both economies," Tai Hui, APAC chief market strategist at JPMorgan Asset Management, said of the move in U.S. and Japanese yields.
Brent crude rose nearly 2% to over $92 a barrel on Tuesday and European natural gas prices were at their highest since March, after Monday saw the first exchange of direct attacks between the U.S. and Iran in a month. [O/R][NG/EU]
End of an Era?
END OF ERA? DEFINITELY
For Japan in particular, higher yields increase the cost of servicing the developed world's biggest debt pile at a time when Prime Minister Sanae Takaichi is planning aggressive investment.
U.S. 10-year Treasury yields pushed to the highest since January 2025 at 4.798%, while the 30-year yield was at 5.27% just 6 basis points shy of levels before August's intervention. [US/]
U.S. Treasury Secretary Scott Bessent says that worries about rising debt and yields overlook the strength of the U.S. economy.
Germany's 10-year yield was at 3.35%, its highest since 2011,, as data showed euro zone inflation rose above 3% in August, cementing bets on a September European Central Bank rate rise, while Britain's 10-year gilt yield rose to 5.25%, its highest since 2008. [GVD/EUR]
British and euro zone yields hit fresh over-10-year highs as the Middle East crisis stoked price pressures globally, driving market bets that central banks will raise interest rates soon.
Real Yields as a Key Driver
Regional Differences in Yield Drivers
REAL YIELDS A DRIVER
Analysts noted some different forces at play as global borrowing costs rise.
"In Europe and the UK it is more because of heightened inflation expectations, while in the U.S. the upticks in long-end yields are still more driven by higher real yields, although inflation expectations have been creeping up too," said Frances Cheung, OCBC's head of FX and rates strategy.
Understanding Real Yields
Real yields are the returns that a bond investor demands above inflation, an indicator of true borrowing costs for governments and companies, and can be affected by several factors, including long-run economic growth.
Market Reactions and Outlook
Bessent also shrugged off worries about the bond market in an interview with Reuters on Sunday, saying the effect of higher energy prices would fade.
Michiel Tukker, senior rates analyst at ING, said economic growth combined with higher deficits and bond sales are pushing up real yields.
"There's no easy turnaround ... and if you ask who will take the other side of this trade (i.e. betting yields will fall), that's difficult to see," he said.
Global Contagion Effect
And the global story can become self-reinforcing, since higher yields in one market can push them up elsewhere.
