Long-term borrowing costs across major economies climbed to multi-decade highs on Tuesday, as investors reassessed the outlook for inflation, government finances and the enormous financing requirements associated with the artificial intelligence boom.
The yield on 30-year US Treasuries rose 0.02 percentage points to 5.33 per cent, its highest level since 2007, taking its increase this week to 0.06 percentage points. At the beginning of last month, the yield was below 5 per cent.
The rise was mirrored across Europe. The 30-year German Bund yield increased 0.04 percentage points to 3.78 per cent, its highest since the Eurozone crisis in 2011. France’s 30-year yield rose 0.03 percentage points to 4.9 per cent, its highest since 2008.
“Long-end yields have largely been following oil prices” in recent days, said Mohit Kumar, chief European economist at Jefferies. “As oil goes to $90 and above, inflation concerns start to dominate.”
UK government borrowing costs also moved higher. The 30-year gilt yield rose as much as 0.04 percentage points to 5.86 per cent on Tuesday morning, approaching a post-1998 high reached during the early weeks of the Iran war.
In Japan, 30-year yields rose 0.06 percentage points to 4.14 per cent, close to their highest level ever.
Government bond markets have come under sustained pressure since the start of the US-Iran conflict, as higher energy prices have raised fears of a prolonged global inflation shock. Brent crude closed above $90 a barrel on Monday for the first time in two weeks and was trading at about $91.25 on Tuesday morning, contributing to the latest decline in government bonds.
The pressure is also being driven by concerns over public finances. “The background of fiscal concerns also remains,” Kumar said.
Government debt has expanded substantially in major economies, with the US debt pile approaching $40tn. Investors are increasingly concerned that governments could face pressure to increase spending to shield businesses and consumers from the economic consequences of higher energy prices.
“The worsening situation in the Middle East is likely a factor in intensifying concerns over inflation and concerns over the US fiscal position,” said Derek Halpenny, head of global markets research at MUFG. “There remains zero appetite in the US for addressing the US fiscal position and that is increasingly weighing on the long end of the curve.”
The renewed bond sell-off and higher oil prices also affected equity markets. Futures tracking the S&P 500 and Nasdaq 100 fell 0.5 per cent and 1.2 per cent respectively.
The increase in long-term yields means the US government last week paid its highest interest rates since 2011 to sell 30-year bonds. Peter Schaffrik, global macro strategist at RBC Capital Markets, said weaker US economic data, including non-farm payrolls and retail sales, could also have contributed to investor concerns about long-term bonds.
“We have these fiscal concerns over the medium term . . . how are you going to maintain your fiscal sustainability if you have yawning deficits and at the same time growth starts slowing down?” Schaffrik said. He described the increase in long-term borrowing costs as “a multiyear story, and it’s not over”.
Anshul Pradhan, head of US rates research at Barclays, identified three factors behind the sell-off in long-term Treasuries: “the budget deficit outlook, AI-related corporate issuance and the changing Treasury buyer base.”
The rapid expansion of AI investment is creating another source of pressure. Big Tech companies have increasingly turned to foreign debt markets to finance their large-scale AI spending, with a particular emphasis on long-dated borrowing. Barclays expects total investment-grade issuance in 2026 to reach a record $1.9tn, compared with $1.44tn last year.
Pradhan said the “scale and maturity of AI-related corporate borrowing” was contributing to investors demanding greater compensation to absorb increased corporate and government debt supply.
MUFG’s Halpenny said the “unprecedented demand for capital to finance AI investments must also be playing a role here”.
The pressure has been particularly visible at the longer end of government bond markets, producing a steepening of yield curves globally as the gap between short-term and long-term borrowing costs widens.
Some investors are also betting that this divergence will continue, through what is known as the “steepening trade”. Such positioning may itself be contributing to higher long-term yields.
“The steepening theme remains firmly in control and, for now, it is difficult to argue against the momentum,” said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho.
