Key Takeaways
- Global bond markets have sold off sharply, sending yields to multidecade highs.
- Investors say bond markets in the US, Japan, and Europe are responding to a range of factors, including growing government deficits and ballooning AI debt.
- The latest rout follows a steady march higher in bond yields, with analysts suggesting the trend could continue.
Major government bond markets from the United States to Japan have been selling off, driving yields to their highest levels in many years.
Behind the drop in bond prices and rise in borrowing costs for governments, companies, and individuals, analysts see a diverse group of strong forces. They include rising government deficits, a massive increase in corporate borrowing to fund the artificial intelligence buildout, and concerns about inflation sparked by the jump in energy prices amid the Iran war. “It’s multifaceted,” says Brad Collins, senior fixed-income client portfolio manager at Vanguard. “There are so many components at play.”
In the US bond market, the yield on the 30-year Treasury climbed above 5.31% from below 5.00% at the end of June, its highest level in almost two decades. In Europe, some government bond yields reached or exceeded the levels seen during the 2011 euro crisis. The 30-year German bund yield hit 3.75% for the first time since 2011, French borrowing costs hit a peak last seen in 2008, and the 30-year UK gilt neared its May peak of 5.85%, the highest level since 1998. In Japan, equivalent maturity yields approached an all-time high.
For long-term debt, “this is a global repricing,” says Steve Boothe, a portfolio manager and head of global investment-grade bonds at T. Rowe Price.
The move in bond yields has been so steep that on Wednesday morning, the US Treasury surprised the bond market by announcing that it would “at least double” the amount of older long-term debt it purchases through an existing repurchase program. Analysts say it’s an attempt to push long-term yields back down.
While yields moved slightly lower on the news, John Briggs, head of US rates strategy at Natixis, notes the scale of the planned buying represents less than 3% of outstanding long-term Treasury debt and under 30% of the debt it’s expected to issue this year. “The more important part is the signaling from it. If yields go too far, Treasury will try and fight it, and now we know where some pain points are,” he says. “That said, the longer-term structural headwinds are unchanged and will continue to weigh on yields.”
Despite the US government’s unexpected move, money managers and analysts are not concerned by the rise in yields. “The backup in long-end government yields is real, but we think this is a necessary normalization, not a crisis,” Lawrence Gillum, chief fixed-income strategist for LPL Financial, wrote in a note Wednesday afternoon.
Inflation and Growth Pressures on Yields
The recent rise in long-term yields comes against the backdrop of upward pressure on inflation sustained by higher energy prices resulting from the Iran war. Fixed-income investors had to consider a bleaker inflation outlook this week after President Donald Trump said talks with Iran were over and Brent crude oil prices again climbed above USD 90.
While the US economy has been somewhat shielded from the impact of war-driven energy shocks by the country’s position as an exporter of oil and natural gas, it’s a significant issue in the United Kingdom, Europe, and Japan. Inflation risks are a “key consideration” for investors, says Fraser Lundie, global head of fixed income at Aviva Investors.
In the UK, for example, higher energy prices pushed inflation to a four-month high of 2.9% in July, fresh data showed Wednesday. Meanwhile, eurozone inflation similarly rose to 2.9%, up 0.1 percentage point from the previous month, driven by energy prices. Against this backdrop, markets continue to assign a high probability to a 25-basis-point interest rate hike in September, with ECB Watch putting the probability at 96%.
It’s a somewhat different picture in the US bond market. The most recent rise in long-term Treasury yields comes despite decent inflation news and a scaling back of expectations for Federal Reserve interest rate increases this year. Although overall inflation remains above the Fed’s 2% target, economists say there has been little evidence that higher gas prices have bled through the rest of the economy. Instead, price pressures appear to be on a gradual softening trend. At the same time, the likelihood of the Fed raising rates in September has fallen to 35% from over 50% a month ago, according to the CME FedWatch Tool.
The most recent inflation data “was relatively benign,” says T. Rowe Price’s Boothe. He adds that among inflation-linked Treasury debt, inflation expectations “have been reasonably well-behaved.”
At Vanguard, Collins says the view of the rise in yields largely links back to the strength of the US economy. He says that coming into 2026, there were expectations of a slowdown in growth, and that the Fed would cut rates this year. Instead, “the economy is chugging along,” and the long end is “responding to the healthy economy, and the driver is AI capex spending, which is keeping [growth] expectations high.”
Fiscal Worries
Another building pressure point is growing government deficits. In the US, the need to sell more debt to fund the deficit has been rising for years. On Wednesday, the Treasury announced that total US debt hit USD 40 trillion, after crossing USD 39 trillion in March. In Europe, the Ukraine war is leading some governments to ramp up military spending, which is threatening to expand deficits.
In the UK, domestic government bonds, known as gilts, have long reflected unease about the government’s precarious fiscal position. The government has two fiscal rules it must follow: National debt must fall as a share of gross domestic product by 2029/30, and day-to-day government spending must be “in balance” so it is not continually borrowing to pay for everyday operations.
So far, the signs have not been encouraging. Though the Office for Budget Responsibility said in its June bulletin that borrowing in the first three months of the 2026/27 fiscal year was GBP 3.7 billion below the same period last year, central government spending remains GBP 3.6 billion above forecast due to “higher debt interest spending and net social benefits.”
Yields are also climbing in Japan, amid inflation and fiscal worries. Public debt is already over 200% of gross domestic product. This could impact US Treasuries, too. The 4% yield on Japanese government bonds has begun to attract Japanese investors, who have historically been major buyers of US debt. Japan is the largest foreign holder of Treasuries, with a value exceeding USD 1.2 trillion. According to Fabrizio Quirighetti, CIO and head of multi-asset at Decalia, “a repatriation, whenever it comes in earnest, would happen at Treasuries’ expense by adding additional upward pressures on US financing costs.”
Ballooning AI Debt Adds to Concerns
More dramatic than the slow growth of government deficits is the explosion of AI-related debt. T. Rowe Price’s Boothe says the selloff and rise in bond yields reflect supply/demand imbalances in both global government bond markets and the investment-grade corporate bond market.
For US Treasuries and other government bond markets, “a lot of people like to focus on the inflation print or lack of inflation, deficits, etc. But you’ve really had a shift in the composition of demand,” Boothe says. Meanwhile, he says the supply equation has changed dramatically in the investment corporate bond market, thanks to the massive wave of bond sales by hyperscalers to fund the AI infrastructure buildout. That issuance is leading to “quite simply a supply and demand imbalance, and that’s being rectified through price.”
Although bond market analysts had anticipated an uptick in 2026 issuance from the likes of Amazon AMZN, Alphabet GOOGL, Microsoft MSFT, Meta Platforms META, and Oracle ORCL, levels have already far exceeded expectations. Analysts at Goldman Sachs, for instance, expected USD 322 billion in AI-related debt in the investment-grade, high-yield, and leveraged loan markets in 2026. By late July, that total was already approaching USD 500 billion. At JP Morgan, analysts expect some USD 400 billion in hyperscaler and data center financing for 2026, up from the USD 320 billion expected late last year.
As part of this wave, hyperscalers have become heavy issuers in markets they don’t typically tap, such as the euro-denominated investment-grade market. In some smaller markets, these companies now represent a disproportionate percentage of issuance, as Goldman noted in a late July report. Hyperscalers accounted for 21% of total gross issuance in the Canadian market and 19% of Swiss franc-denominated investment-grade corporate debt, according to the data, with those totals expected to keep growing in the years ahead. “If we repeat this next year, we’ll have increased volatility in the back half in the [bond market], and you’ll see yields continue to turn higher,” says Boothe.
Ollie Smith contributed to this article.
