A worldwide sell‑off of government bonds accelerated on Tuesday, driving borrowing costs in several major economies to multi‑decade highs. The surge threatens to spread across various debt instruments, affecting business loans and mortgages for already financially strained households.
Investors are demanding higher yields to hold sovereign debt because of several converging forces: surging borrowing by the world’s wealthiest economies, widening fiscal deficits, lingering inflation, and limited evidence that policymakers are prepared to address these challenges.
The yield on 10‑year U.S. Treasury notes—an influential benchmark globally—climbed to its highest level since January 2025, briefly topping 4.8%, while the 30‑year Treasury yield remained near a two‑decade peak. Since yields move opposite to bond prices, the increase signals a decline in market values.
Rising U.S. borrowing costs have sparked a public dispute between Treasury Secretary Scott Bessent and investors, although the underlying drivers of higher yields are shared across major markets.
“It’s a global story,” said Peter Schaffrik, a strategist at RBC Capital Markets in London.
The escalation of oil prices following the outbreak of hostilities in Iran has intensified concerns about stubborn inflation. Secretary Bessent, attending a G20 finance meeting in Asheville, N.C., downplayed market volatility, telling Fox Business, “I don’t think we’re in any kind of dire situation.”
This week, Japan’s 10‑year bond yield rose above 3% for the first time since 1996, the UK’s reached its highest level since mid‑2007, and German yields hit peaks last seen in 2011.
Technology firms’ aggressive borrowing to fund artificial‑intelligence infrastructure is adding pressure on debt markets. These companies, often called hyperscalers, have issued billions of dollars in bonds—much of it in euros—drawing capital away from sovereign issuances and driving up costs across all debt categories.
“It’s becoming harder and harder to disentangle” all the factors behind the moves in bond markets, said Ed Al‑Hussainy, a portfolio manager at Columbia Threadneedle. “The only thing we can say right now is that they’re all pointing in the same direction, and that’s in the direction of higher rates, and they’re doing it globally.”
Equities worldwide fell on Tuesday. In New York, the S&P 500 declined, while Japan’s Nikkei closed lower and Europe’s Stoxx 600 slipped by roughly 0.5%.
A key unpredictable driver of bond‑market stress is the ongoing conflict in Iran. Recent escalations between the U.S. and Iran have lifted oil and natural‑gas prices. Brent crude rose above $95 a barrel on Tuesday—approximately 30% higher than pre‑war levels.
Refined‑fuel prices, including gasoline and diesel, have surged even faster, heightening inflation expectations that may force central banks to tighten short‑term rates. Elevated fuel costs also burden large energy‑importing governments across Asia and Europe.
Eurozone consumer prices accelerated 3.3% year‑over‑year in August—the fastest rise in almost three years—driven by persistent energy costs. The European Central Bank is anticipated to raise rates at its next policy meeting, marking its second hike since the Iran conflict began.
Market participants are stepping up wagers that the Federal Reserve will lift rates at its upcoming meeting later this month. Chair Kevin M. Warsh warned last week that the Fed would need to do more if inflation pressures did not moderate promptly, placing responsibility for the prolonged “sustained, elevated inflation” squarely on the central bank. Several fellow policymakers have already been vocal about the need for higher rates.
Higher rate expectations are now clashing with already elevated government debt levels. U.S. gross national debt surpassed $40 trillion for the first time last month, exceeding 120% of GDP. France’s public debt topped €3.5 trillion (≈$4 trillion), or about 117% of its economy, while Japan continues to run a debt stock more than double its GDP despite heavy spending.
Investors view many politicians as insufficiently concerned about these debt burdens, instead seeing fiscal plans that are unlikely to reduce budget deficits.
Consequently, with further borrowing anticipated, investors are demanding higher yields to hold sovereign bonds.
“The confrontation between bond markets and policymakers is becoming a battle of attrition,” Geoffrey Yu, a strategist at BNY, wrote in a note on Tuesday. “Persistent inflation, fiscal concerns and energy risk continue to push investors to demand greater compensation.”
In Europe, France is a focal point of investor skepticism ahead of next year’s presidential election, where none of the leading candidates appear to offer credible debt‑reduction plans. The country’s image as a safe haven has weakened, and it is now viewed as the region’s most concerning debt market, outpacing historically troubled southern economies such as Italy and Greece. French yields have already surpassed those of Italy this summer.
Some investors contend that the bond market reaction also reflects robust economic growth, which may sustain upward pressure on yields while making long‑term fixed‑income assets more attractive in Europe. “That may keep upward pressure on yields in the near term, but it is also creating a more attractive backdrop for long‑term fixed‑income investors,” noted Jenny Zeng of Allianz Global Investors in a note.
Ed Al‑Hussainy of Columbia Threadneedle observed that investors are testing the tolerance of both markets and governments. “We are living in a world—and in an economy here in the U.S.—that seems to be able to handle these higher yields without anything breaking,” he said, adding that trading has not displayed disorder and that measures such as demand at bond auctions have remained normal.
Analysts suggest that recent bond‑market volatility may have been amplified by typically thinner summer trading volumes, but the outlook for a swift easing of upward pressure on yields remains uncertain.
RBC’s Peter Schaffrik warned that bond‑market pressure could compel policymakers to adopt tougher debt‑and‑deficit measures, observing, “You need some kind of a disciplinary factor, and that’s probably the bond market.”