U.S. Treasury yields are reaching new highs, along with bond yields in other major economies, as investors worry about high government debt levels.Ken Cedeno/Reuters
A global sell-off in government bonds intensified Tuesday, pushing borrowing costs in some of the world’s largest economies to the highest levels in decades. The moves threaten to ripple through a wide range of debt, including business loans and mortgages for already-stretched consumers.
A combination of factors are prompting investors to demand higher returns to hold government debt: a flood of borrowing by the world’s richest nations, expanding budget deficits, persistent inflation, and few signs that countries are able or willing to take steps to improve these conditions.
The yield on 10-year U.S. Treasury notes, perhaps the world’s most influential interest rate, reached its highest since January, 2025, briefly hitting 4.8 per cent, and the yield on the 30-year bond continued to hover around a two-decade high. Yields move inversely to prices, so the rise in yields reflects a drop in prices.
The United States’ rising borrowing costs have set off a battle between U.S. Treasury Secretary Scott Bessent and investors, but the factors pushing up bond yields in the United States are also issues in other big markets.
“It’s a global story,” said Peter Schaffrik, a strategist at RBC Capital Markets in London.
The rise in oil prices since the start of the war in Iran has compounded worries about stubbornly high inflation. Bessent is meeting with international finance ministers this week in Asheville, North Carolina, for a Group of 20 meeting, as U.S. foreign policy continues to upend the global economy. On Tuesday, he downplayed the market moves. “I don’t think we’re in any kind of dire situation,” he said in an interview with Fox Business at the meeting.
This week, the yield on 10-year bonds in Japan climbed above 3 per cent for the first time since 1996; in Britain, they reached their highest level since mid-2007; and in Germany, they hit levels last seen in 2011.
A borrowing binge by technology companies to build artificial intelligence systems is another factor pushing up the costs of all types of debt. Companies have issued billions of dollars in bonds, swamping markets and pulling investors away from government debt. These companies, known as hyperscalers, are also increasingly turning to euro-denominated bonds.
“It’s becoming harder and harder to disentangle” all the factors behind the moves in bond markets, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, an investment firm. “The only thing we can say right now is that they’re all pointing in the same direction, and that’s in the direction of higher rates, and they’re doing it globally.”
Stocks around the world also dropped Tuesday. The SandP 500 fell in New York. Japan’s benchmark index, the Nikkei, closed lower, and the Stoxx Europe 600 slipped half a percent.
One of the most pressing and unpredictable drivers of bond market turmoil is the protracted war in Iran. As the United States and Iran renewed attacks recently, the price of oil and natural gas began to climb again. Brent crude, the international oil benchmark, rose Tuesday to above $93 a barrel, nearly 30 per cent higher than prewar levels.
The jump in energy costs – the prices of refined fuels like gasoline and diesel have risen even faster – has increased expectations of accelerating inflation that could prompt central banks to raise the short-term interest rates they control. Higher fuel prices also add enormous costs to governments in Asia and Europe, which are big energy importers.
Consumer prices in the eurozone rose 3.3 per cent in August compared with a year earlier, the fastest pace of inflation in nearly three years, as energy prices stayed high. The European Central Bank is widely expected to raise interest rates at its policy meeting next week, which would be the second increase since the war in Iran started.
Traders have also increased their bets that the Federal Reserve may raise interest rates at its next meeting this month. Fed Chair Kevin Warsh said last week that the central bank would have “work to do” if price pressures did not ease in a timely fashion. In his most hawkish comments yet, he said responsibility for the long stretch of “sustained, elevated inflation” sat squarely with the central bank. Some of his fellow Fed policymakers have already been pushing to raise rates.
These expectations for higher interest rates are colliding with government debt levels, which in some cases have already reached eye-watering levels. The United States’ gross national debt topped US$40-trillion for the first time last month, or more than 120 per cent of the size of its economy. In France, public debt exceeded 3.5-trillion euros (about US$4-trillion), which is 117 per cent of the size of its economy. In Japan, the government is spending heavily despite a public debt pile that is more than twice the size of its economy.
In the eyes of investors, many politicians don’t appear worried enough about these debt levels. Instead, investors see government plans that are not likely to shrink budget deficits.
And so, with expectations of more borrowing to come, investors are demanding higher returns to hold government bonds.
“The confrontation between bond markets and policymakers is becoming a battle of attrition,” Geoffrey Yu, a strategist at BNY, wrote in a note Tuesday. “Persistent inflation, fiscal concerns and energy risk continue to push investors to demand greater compensation.”
In Europe, France is at the forefront of investors’ skepticism in the run-up to a presidential election next year, in which none of the front-runners appear to have what investors consider credible plans to reduce ballooning debt levels. France’s reputation as one of Europe’s safer financial havens has been eroded, and it is quickly becoming the region’s most worrisome debt market, more than the southern European economies such as Italy and Greece that were at the center of past debt crises. This summer, the yield on French government bonds climbed above Italy’s.
Some investors argue that the bond market moves are also, in part, a reflection of resilient economic growth, despite all the obstacles, and a more encouraging explanation for recent moves in markets. “That may keep upward pressure on yields in the near term, but it is also creating a more attractive backdrop for long-term fixed-income investors” in Europe, Jenny Zeng, a fixed-income investor at Allianz Global Investors, wrote in a note.
Al-Hussainy said investors were also testing the limits of what markets and governments could accept. “We are living in a world – and in an economy here in the U.S. – that seems to be able to handle these higher yields without anything breaking,” he said, noting that he believed trading hasn’t shown signs of being disorderly. Across many measures, including demand for newly issued bonds at auctions, things have looked normal, he added.
The recent volatility across global bond markets may have also been exacerbated by lower trading volumes in summer. Still, it is not clear whether the pressures pushing up yields will resolve anytime soon, analysts say.
Pressure from the bond market may force political leaders to take stronger action on debt and deficits, Schaffrik said. “You need some kind of a disciplinary factor, and that’s probably the bond market,” he noted.