Global bond sell-off deepens amid fears over inflation and AI issuance
Long-term government borrowing costs hit multi-decade highs
Long-term borrowing costs across major economies hit multi-decade highs on Tuesday as inflation concerns, deficit fears and surging AI bond issuance put pressure on government debt around the world.
The yield on 30-year US Treasuries rose 0.02 percentage points to 5.33 per cent, its highest since 2007, taking its rise this week to 0.06 percentage points. At the start of last month it was below 5 per cent.
European long-dated yields also rose. The 30-year German Bund yield rose 0.04 percentage points on Tuesday to 3.78 per cent, its highest since the Eurozone crisis in 2011. French yields of the same maturity rose 0.03 percentage points to 4.9 per cent, the highest since 2008.
“Long-end yields have largely been following oil prices” in recent days, said Mohit Kumar, chief European economist at Jefferies. “As oil goes to $90 and above, inflation concerns start to dominate.”
In the UK, the 30-year gilt yield rose as much as 0.04 percentage points to 5.86 per cent on Tuesday morning, within touching distance of a post-1998 high that it reached in the early weeks of the Iran war.
In Japan, 30-year yields rose 0.06 percentage points to 4.14 per cent on Tuesday, close to their highest ever.
Government borrowing costs have jumped this year since the start of the US-Iran conflict, as higher energy prices have prompted fears of a prolonged global inflation shock.
Brent crude prices closed above $90 a barrel on Monday for the first time in two weeks and were around $91.25 on Tuesday morning, prompting the latest bout of weakness in government bonds.
In addition, Kumar said that “the background of fiscal concerns also remains”.
The ballooning size of governments’ debts has been weighing on long-term borrowing costs in recent weeks, as the US debt pile nears $40tn and investors fret that governments might be forced into additional spending to protect businesses and consumers from the economic cost of higher energy prices.
“The worsening situation in the Middle East is likely a factor in intensifying concerns over inflation and concerns over the US fiscal position,” said Derek Halpenny, head of global markets research at MUFG. “There remains zero appetite in the US for addressing the US fiscal position and that is increasingly weighing on the long end of the curve.”
Tuesday’s renewed bond market sell-off and higher oil prices also weighed on equities, with futures tracking the S&P 500 and Nasdaq 100 down 0.5 per cent and 1.2 per cent respectively.
The shift higher in long-dated bond yields meant that the US government last week was forced to pay the highest interest rates since 2011 to sell 30-year bonds.
Peter Schaffrik, global macro strategist at RBC Capital Markets, said some weaker US economic data last week — including non-farm payrolls and retail sales — could have added to investors’ fears about long-dated bonds.
“We have these fiscal concerns over the medium term . . . how are you going to maintain your fiscal sustainability if you have yawning deficits and at the same time growth starts slowing down?” Schaffrik said.
He added that the rise in long-term borrowing costs was “a multiyear story, and it’s not over”.
Anshul Pradhan, head of US rates research at Barclays, said: “We think there are three factors at play [in the long-end Treasury sell-off]: the budget deficit outlook, AI-related corporate issuance and the changing Treasury buyer base.”
Big Tech companies have increasingly been turning to foreign debt markets to finance their enormous spending on AI investments, with a particular focus on issuing long-dated debt. Barclays expects total investment-grade issuance in 2026 to hit a record $1.9tn, compared with last year’s $1.44tn.
Pradhan said that “the scale and maturity of AI-related corporate borrowing” at the longer end of yield curves was contributing to “investors requiring more compensation to absorb [corporate and government] supply”.
MUFG’s Halpenny said: “The unprecedented demand for capital to finance AI investments must also be playing a role here.”
The sell-off in longer-dated debt has been accompanied by a steepening in yield curves for government bonds globally, as the difference between short-term and long-term borrowing costs has widened.
Some analysts said the popularity of a “steepening trade”, where investors bet on that difference continuing to widen, was itself contributing to long-end yields pushing higher.
“The steepening theme remains firmly in control and, for now, it is difficult to argue against the momentum,” said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho.