Global bond yields hit multi-decade highs as oil, inflation and debt worries mount: Report

Government borrowing costs across major economies are climbing to multi-decade highs as renewed oil price pressures, persistent inflation concerns and rising public debt test bond markets, Reuters reported on October 1.

The 10-year US Treasury yield, a key benchmark for global borrowing costs and asset valuations, touched 5.34% on Thursday, its highest level since 2002. It recorded its biggest quarterly increase so far this century in the third quarter, rising by almost 90 basis points.

Bond yields have also surged across other major markets. French 10-year yields reached their highest level since 2002, while Britain's 30-year borrowing costs touched 6% for the first time since 1998. Japanese government bond yields have also climbed to multi-decade highs.

According to Reuters, a renewed increase in oil prices amid US-Iran tensions is adding to inflation concerns and raising expectations that interest rates could remain higher for longer. Investors are also increasingly focused on governments' growing borrowing requirements.

The US national debt has crossed $40 trillion, while debt-to-GDP ratios are at or above 100% across all G7 economies except Germany, Reuters reported.

Indian government bonds came under pressure on Thursday as global yields rose and inflation concerns intensified ahead of an expected RBI rate hike next week. The benchmark 10-year bond yield rose 3 basis points to 7.2133%, its highest since April 2024, and was up nearly 10 basis points for the week.

Indian yields tracked US Treasuries, with the 10-year US yield briefly hitting a 24-year high before settling at 5.30%. The yield gap between the US and Indian benchmarks narrowed to its tightest in more than a year.

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Why rising yields matter

Higher bond yields raise borrowing costs across the economy, affecting government debt as well as mortgages, student loans and auto financing. More expensive credit can discourage household consumption and corporate investment, potentially weighing on economic growth.

In the US, the rate on the most popular home loan rose above 7% last month to its highest level in more than two years.

Governments are also facing higher debt-servicing costs as existing bonds mature and are refinanced at higher rates. Britain's interest bill has risen to almost 4% of economic output, roughly double its pre-pandemic decade average, according to the country's fiscal watchdog.

The Institute of International Finance has estimated that major economies now spend more on interest payments than the world invests in artificial intelligence, defence or clean energy, Reuters reported.

Higher yields can also put pressure on equity markets by making bonds relatively more attractive, although strong corporate earnings have kept stocks near record levels so far.

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AI borrowing adds to bond supply

A surge in debt issuance by major technology companies is adding another layer of pressure. Five large AI hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — have issued $220 billion of debt this year to fund data centres and AI models, more than twice last year's total, according to LSEG data cited by Reuters.

More issuance is expected, increasing the supply of bonds that investors need to absorb.

Can central banks intervene?

The US Treasury has announced bond buybacks aimed at supporting market liquidity, but long-term yields have continued to rise.

Central banks can also purchase government bonds during periods of severe market stress. The Bank of England did so during the 2022 UK mini-budget crisis, while the European Central Bank has a mechanism to address an "unwarranted, disorderly" rise in borrowing costs.

However, Reuters reported that Bank of France Governor Emmanuel Moulin cautioned against expecting the ECB to intervene simply to contain a selloff in French bonds.

For investors, the central question is whether yields can stabilise without a meaningful improvement in government debt dynamics or stronger economic growth.

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