LONDON/NEW YORK – Long-term borrowing costs from the US to Germany and Japan hit their highest in decades on Aug 18 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 US 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 US debt pile nearing US$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.
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 is “entirely unsurprising: the fiscal outlook in several major economies is problematic, and politicians have shown little appetite for addressing the issue”.
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 Aug 18 as oil prices rose back above US$90, fanning inflation worries as US-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 Aug 18.
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.
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.
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.
US 10-year Treasury yields, at around 4.71 per cent, are now trading at levels that in the past have attracted the attention of US officials, with 5 per cent 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 US Treasury.”
A Treasury spokesperson did not respond to a request for comment.
What is 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 US Treasuries slid in June led by declines in the holdings of Japan – the biggest foreign holder of US bonds – Britain and China. Two recent Treasury auctions also drew attention for high yields.
Changing dynamics in Japan
Rising bond yields in Japan, where 30-year borrowing costs are just above 4 per cent, are also starting to draw in Japanese investors, traditionally big buyers of US debt, creating another headwind for the US bond market.
For some bond investors, rising yields were making the market attractive, which could support prices from here.
“We are long on duration. I don’t expect it (the current bond selloff) will last,” said Pictet senior investment adviser Christopher Dembik. REUTERS
