Government borrowing costs in major economies are climbing to multi-decade highs as investors grow increasingly concerned about inflation, interest rates and the growing debt burdens of governments and companies.
The rise in bond yields could put additional pressure on households and businesses while making it more expensive for governments to service and refinance their debt.
Here is a look at what is driving the latest selloff in global bond markets.
Bond yields hit multi-decade highs
The 10-year US Treasury yield, a key benchmark for global borrowing costs and financial markets, reached 5.34% on Thursday, its highest level since 2002.
The yield rose by almost 90 basis points in the third quarter, marking its biggest quarterly increase so far this century.
Other major economies have also seen sharp increases. French 10-year government bond yields have reached their highest level since 2002, while Britain’s 30-year borrowing costs have climbed to 6%, the highest since 1998.
Japanese bond yields are also at multi-decade highs.
A renewed increase in oil prices linked to tensions between the United States and Iran has added to inflation concerns, prompting investors to prepare for the possibility of higher interest rates.
At the same time, governments are facing growing borrowing and spending requirements. US government debt has surpassed $40 trillion, while debt relative to economic output is at or above 100% across most G7 economies.
Why rising yields matter
Bond yields influence borrowing costs throughout the economy, affecting everything from government debt and corporate financing to mortgages, student loans and car loans.
Higher borrowing costs can discourage spending and investment, potentially slowing economic growth.
In the United States, the rate on the most popular home loan rose last month to its highest level in more than two years, moving above 7%.
Governments are also feeling the impact as they refinance existing debt at higher rates. In Britain, the government’s interest bill has risen to almost 4% of economic output, roughly twice its pre-pandemic decade average, according to the country’s fiscal watchdog.
Higher yields can also affect financial markets by making bonds relatively more attractive compared with stocks. However, strong corporate earnings have helped equity markets remain near record levels.
AI boom adds to borrowing pressure
The rapid expansion of artificial intelligence is creating another source of demand for borrowing.
Major technology companies are issuing large amounts of debt to finance data centres, computing infrastructure and AI models. According to LSEG data, Alphabet, Amazon, Meta, Microsoft and Oracle have issued a combined $220 billion in debt so far this year, more than twice last year’s total.
More borrowing is expected as companies continue investing heavily in AI infrastructure.
The increased supply of bonds can push yields higher because investors may demand greater returns to absorb additional debt issuance.
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What can governments and central banks do?
US Treasury Secretary Scott Bessent has argued that concerns over rising debt and yields overlook the strength of the US economy.
The US Treasury has also announced bond buybacks, which analysts say are intended to help manage borrowing costs and improve market liquidity. However, yields on longer-dated bonds have continued to rise.
Central banks have tools available if bond markets become severely disrupted. The Bank of England, for example, intervened during the 2022 UK mini-budget crisis by buying government bonds.
The European Central Bank can also purchase government debt through its Transmission Protection Instrument to address an “unwarranted, disorderly” increase in borrowing costs, provided countries meet relevant fiscal requirements.
Bank of France Governor Emmanuel Moulin has cautioned against assuming the ECB would intervene simply to prevent a selloff in French government bonds.
Who are the bond vigilantes?
The latest increase in yields reflects concerns over government borrowing, inflation and the sustainability of public finances, according to investors.
While lower oil prices could provide some short-term relief, longer-term borrowing costs are likely to depend on whether governments can reduce debt levels or generate stronger economic growth.
This is where the term “bond vigilantes” comes in.
The phrase refers to investors who demand higher returns from governments they believe are pursuing unsustainable fiscal policies.
Investors may also demand higher compensation when they believe policymakers are failing to keep inflation under control.
For governments, the message from rising bond yields is clear: higher borrowing costs can quickly translate into greater pressure on public finances, households and businesses.
