Global Bond Markets Signal Warning on Government Debt and Inflation Risks
Rising Yields and Their Impact on Global Financial Stability
By Dhara Ranasinghe, Gregor Stuart Hunter, Samuel Indyk and Gertrude Chavez-Dreyfuss
Decades-High Borrowing Costs Across Major Economies
LONDON/NEW YORK, Aug 18 (Reuters) - Long-term borrowing costs from the U.S. to Germany and Japan hit their highest in decades on Tuesday due to ballooning government debt and geopolitics, raising borrowing costs for companies and households and complicating policy.
Bond markets are entering an era where the inflation and interest rate outlook is more uncertain and the upside risks are greater, as U.S. President Donald Trump’s policies — from tariffs to war — upend the global order.
Debt levels in developed countries are reaching thresholds that look increasingly unsustainable, with the U.S. debt pile nearing $40 trillion. The Iran war is dragging on, pushing up oil prices and inflation and hitting global growth.
In addition, massive borrowing by technology companies to fund a buildout of AI infrastructure is competing with demand for government bonds.
Investor Sentiment and Fiscal Concerns
Bond yields' recent surge "suggests investors are losing patience with fiscal profligacy," said Jonas Goltermann, chief markets economist at Capital Economics.
But he said it's "entirely unsurprising: the fiscal outlook in several major economies is problematic, and politicians have shown little appetite for addressing the issue."
Country-Specific Yield Movements
Thirty-year bond yields in the United States, the world's deepest and most systemically crucial government bond market, hit their highest since 2007 earlier on Tuesday as oil prices rose back above $90, fanning inflation worries as U.S.-Iran peace hopes faded. They pulled back in afternoon trading.
The elevated yields could squeeze households, companies, financial markets and the federal budget.
"We believe the long-end has been subjected to death by a thousand cuts," wrote TD analyst Gennadiy Goldberg in a research note, citing a string of reasons for the rise in rates. He wrote that "low investor conviction could leave yields under sustained pressure in the near term."
In Japan, inflation angst and expectations that the central bank could hike interest rates as early as September pushed 10-year borrowing costs to a three-decade high..
In Europe, Germany's 10-year Bund yield touched its highest since 2011, French yields were at their highest since 2008 and Britain's 30-year borrowing costs neared peaks hit in May that marked the highest levels since 1998. When a bond's yield rises, its price falls.
Rising yields hit other assets, with major stock markets such as Nasdaq and Europe's STOXX 600 in the red on Tuesday.
The selloff in government bond markets matters because the repercussions ripple through economies. Sovereign debt sets the benchmark for borrowing costs for companies and other loans, including household mortgages.
Warning Signs: Entering a Danger Zone?
Competing Demands and Market Pressures
ENTERING A DANGER ZONE?
Competition for capital from AI hyperscalers — the technology giants building huge data centres — rising budget deficits and, in the United States, concern about clear communication from the Federal Reserve under new Chair Kevin Warsh, have exacerbated the selling, analysts said.
For some, the higher yields reflect investor worries about how risky the securities have become because of the growing debt pile and uncertainty over policymaking, more than inflation concerns per se.
Term Premium and Treasury Yield Benchmarks
The New York Fed estimates the term premium, or the additional compensation that investors require for lending to the government for 10 years, at around 80 bps, close to its highest level in 12 years.
U.S. 10-year Treasury yields, at around 4.71%, are now trading at levels that in the past have attracted the attention of U.S. officials, with 5% now in focus.
"This will be very important, not just for bond markets, but also other financial assets as any break higher is likely to undermine confidence," said Zurich Insurance Group's chief market strategist Guy Miller.
"Given the importance of this level, we are likely to see it defended by the U.S. Treasury."
A Treasury spokesperson did not respond to a request for comment.
Foreign Holdings and Currency Intervention
What's more, analysts reckon the Treasury's unusual decision to sell euros and not dollars in recent joint intervention with Japan to bolster a weak yen suggests it does not want bond market strains worsened by foreign central banks selling Treasuries to fund currency-support operations.
Foreign holdings of U.S. Treasuries slid in June led by declines in the holdings of Japan — the biggest foreign holder of U.S. bonds — the UK and China. Two recent Treasury auctions also drew attention for high yields.
Changing Dynamics in Japan
Japanese Yields and Global Repercussions
CHANGING DYNAMICS IN JAPAN
Rising bond yields in Japan, where 30-year borrowing costs are just above 4%, are also starting to draw in Japanese investors, traditionally big buyers of U.S. debt, creating another headwind for the U.S. bond market.
For some bond investors, rising yields were making the market attractive, which could support prices from here.
Investor Perspectives
“We are long on duration. I don't expect it (the current bond selloff) will last," said Pictet senior investment adviser Christopher Dembik.
(Reporting by Dhara Ranasinghe, Samuel Indyk and Harry Robertson in London, Stefano Rebaudo in Milan, Gregor Stuart Hunter in Singapore, David Lawder in Washington and Gertrude Chavez-Dreyfuss in New York; Editing by Elisa Martinuzzi, Megan Davies, Susan Fenton, Hugh Lawson, Sanjeev Miglani, Rod Nickel)
