Government borrowing costs from the United States to Germany and Japan have hit fresh multi-decade peaks on heightened worries about inflation and rising interest rates, along with nagging anxiety about nations' debt loads. Elevated bond yields could squeeze households and companies and worsen government finances. Here's a look at what's behind the move in some major economies.
The 10-year US Treasury yield, a yardstick for global borrowing costs and asset prices, hit 5.34% on Thursday, its highest since 2002. It posted the biggest quarterly rise so far this century in the third quarter, up almost 90 basis points, or 0.9 percentage points. French 10-year bond yields have also hit their highest levels since 2002, Britain's 30-year borrowing costs have touched 6% for the first time since 1998, and Japanese bond yields are at multi-decade peaks.
A renewed rise in oil prices on US-Iran tensions is driving yields higher as elevated inflation leaves traders braced for more interest rate hikes. It adds to concerns about governments' rising borrowing and spending needs. The US debt pile has topped $40 trillion, while debt as a share of economic output is at or above 100% across the G7 group of major economies, bar Germany.
Bond yields set the tone for borrowing costs across economies, from government debt to mortgages to student and car loans. Rising rates make borrowing and spending less attractive and can slow economic growth. For instance, the rate on the most popular US home loan rose last month to its highest in more than two years and pierced the 7% level for the first time since the first week of President Donald Trump's current term in office.
Rising yields mean governments face higher costs as they roll over debt. After a borrowing surge and rise in yields, Britain's interest bill of almost 4% of output is now roughly double its pre-pandemic decade average, its fiscal watchdog said in March. Major economies now spend more on interest expense than the world invests in either AI, defence, or clean energy, according to the Institute of International Finance, a lobby group for the financial industry.
Bond yields also ripple through markets. Higher yields can make stocks less attractive, though strong earnings have kept equities buoyant and near record levels so far. And some investors, such as hedge funds, which trade across countless markets, could come under pressure, too.
A surge in bond sales to fund AI investments is another factor pushing up bond yields. Analysts point to the laws of supply and demand: if there is a jump in the need for borrowing, lenders can demand higher interest rates, pushing up yields. Five of the biggest AI hyperscalers - Alphabet, Amazon, Meta, Microsoft and Oracle - have issued $220 billion of debt already this year as they fund investments in data centres and models, LSEG data shows.
This is more than double last year's total figure. More issuance is expected in coming months. US Treasury Secretary Scott Bessent says that worries about rising debt and yields overlook the strength of the US economy.