Global bond markets are experiencing a broad sell-off due to high inflation, expectations of interest-rate hikes and chronic debt burdens. Rising bond yields are increasing financing costs for households and companies while also intensifying pressure on public finances.
The U.S. economy grew more than expected in the second quarter. Indicators related to personal income and consumer spending showed that inflation remained well above the Federal Reserve's 2% target.
Strong economic data and consumer spending pushed up the yield on 10-year U.S. Treasury bonds. Expectations of further monetary tightening also triggered sharp sell-offs in global equity markets.
Historic rise in bond yields
The key indicator of global borrowing costs reached 5.34%, its highest level since 2002. Yields on U.S. Treasury bonds across all maturities rose by about 90 basis points in the third quarter, marking the largest quarterly increase of the century.
Expectations that the Federal Reserve could raise its policy rate at the end of October contributed to investors' continued bond selling. While economists pointed to signs of overheating in the U.S. economy, markets expect the unemployment rate to remain at 4.1% in the September employment report due to be released.
Rising bond yields pushed 30-year mortgage rates above 7% for the first time since the beginning of 2025. The development showed that housing finance costs have also increased.
Rising debt burdens and artificial intelligence investments
According to calculations by the Institute of International Finance, interest payments in major economies have surpassed global investments in artificial intelligence, defense and clean energy. The total U.S. debt burden has exceeded $40 trillion, while the debt-to-GDP ratio stands at 100% or higher in the G7 countries except Germany.
The rapid increase in artificial intelligence investments has also become a structural component of the debt burden. The five largest artificial intelligence technology companies issued $220 billion in bonds this year to finance data-center investments. Rising borrowing needs have intensified upward pressure on interest rates.
The rise in bond yields was not limited to the United States. The yield on 30-year British bonds exceeded 6% for the first time since 1998, while France's 10-year bond yield reached its highest level since 2002. Bond yields in Japan also reached their highest levels in several decades.
Oil prices and European markets
Tensions between the United States and Iran pushed oil prices higher, increasing pressure on inflation and interest rates. Analyst Tim Waterer said bond yields would remain high unless oil prices fell significantly or the issues between the United States and Iran were resolved; he added that macroeconomic pressure was increasing Europe's vulnerability.
U.S. Treasury Secretary Scott Bessent said these problems should not overshadow the overall strength of the U.S. economy. The Treasury Department's decision to at least double the size of its long-term bond buyback operations supported market liquidity but was not enough to end pressure in the bond market.
Experts say governments need to apply fiscal discipline and reduce excessive spending in the face of investors demanding high interest rates. While a possible decline in oil prices could provide short-term relief, public debt must be reduced to bring down long-term borrowing costs permanently.
Volatility in bond markets also put pressure on the euro area and foreign-exchange markets. Francesco Pesole, an FX strategist at ING Group, said the spread between French and German 10-year bond yields had reached 130 basis points after France's budget announcement proved insufficient to address structural deficits.
Pesole warned that the spread could widen to 150 basis points. While bond-market volatility put downward pressure on the euro, the euro-dollar exchange rate could fall to 1.110 if the yield spread widened.
