Global bond markets faced another wave of heavy selling on Thursday, driving borrowing costs in the United States, France, Japan and other major economies toward multi-decade highs.
The sharp rise in government bond yields is increasing pressure on policymakers as investors reassess inflation risks, economic growth and the outlook for interest rates.
U.S. Treasury Yields Retreat After Hitting 24-Year High
Some bargain buying emerged during the late U.S. morning session, helping bond markets stabilize after the earlier selloff.
The benchmark U.S. 10-year Treasury yield fell back toward 5.26% as yields across the Treasury curve declined. However, market analysts warned that further selling pressure could still emerge.
Earlier in the session, the 10-year Treasury yield climbed as high as 5.34%, its highest level since 2002.
The benchmark yield, which plays an important role in determining global borrowing costs and asset valuations, had already recorded its largest quarterly increase this century during the three months ending in September.
Higher Bond Yields Tighten Financial Conditions
Rising interest rates affect almost every part of the economy.
Companies face higher financing costs, mortgage borrowers must deal with more expensive loans, and governments are forced to allocate more money toward interest payments on their debt.
Bond yields move inversely to bond prices. Therefore, when investors sell bonds and prices decline, yields rise.
The latest global bond selloff has been fueled partly by rising energy costs, which have increased concerns that inflation could remain elevated.
At the same time, rapid investment in artificial intelligence and data centers has increased demand for capital. This has also strengthened expectations for economic growth and raised questions about how high short-term interest rates may ultimately need to remain.
TwentyFour Asset Management portfolio manager Danny Zaid said higher yields are tightening financial conditions and could increase the risk of an economic slowdown.
However, he also noted that the broader economy remains relatively strong despite significant differences between income groups.
A so-called K-shaped economy describes an environment in which higher-income households and businesses continue to perform well while lower-income groups face greater financial pressure.
Inflation Concerns Keep Bond Markets Under Pressure
Bond investors are also reacting to several years of inflation running above central-bank targets.
HSBC chief Asia economist Fred Neumann said markets could continue demanding higher premiums for long-term borrowing until sufficient monetary tightening is delivered.
That dynamic is placing governments around the world under increasing pressure as the cost of refinancing existing debt continues to rise.
France Becomes a Major Focus for Bond Investors
France has become one of the biggest areas of concern in European bond markets.
The French government is presenting its 2027 budget bill on Thursday, but proposed spending cuts and other fiscal measures could face significant political resistance in parliament.
French 10-year government borrowing costs climbed to their highest level since 2002, approaching the closely watched 5% threshold.
French bonds had already suffered their weakest quarterly performance since 1987 during the quarter ending in September.
Meanwhile, the spread between French and German 10-year government bond yields is trading near levels last seen during the eurozone debt crisis of the 2010s.
The cost of insuring French government debt against default has also risen to its highest level since 2013.
The growing pressure has even raised questions about whether the European Central Bank could eventually intervene to support the French bond market. For now, however, market participants generally view such action as unlikely.
Global Government Debt Costs Continue to Rise
The pressure is far from limited to France or the United States.
Governments across developed economies are facing rapidly increasing interest expenses as bond yields move higher.
The Washington-based Institute of International Finance recently estimated that advanced economies paid more than $3.3 trillion in interest during the past year on internationally traded government bonds alone.
That figure exceeds estimated global spending of around $2.6 trillion on artificial intelligence, $3.1 trillion on defense and $2.3 trillion on clean energy.
UK and Japanese Bond Yields Reach New Milestones
The selloff has also spread to Britain.
The UK’s 30-year government bond yield moved above 6% on Thursday, reaching its highest level since 1998.
Higher borrowing costs are already affecting parts of the British economy. UK house prices are now rising at their slowest pace in almost two years, highlighting the impact of tighter financial conditions.
Japan is experiencing similar pressure.
After decades of struggling with deflation, the country is now facing more persistent inflation. Japanese sovereign bond yields recorded an unprecedented fifth consecutive quarter of double-digit increases.
Strong Economic Growth Supports Higher Rates
Despite the pressure in bond markets, economic activity has remained relatively resilient.
Factory activity across parts of Europe and Asia expanded last month, supported partly by investment related to artificial intelligence.
Stronger economic growth gives central banks less reason to quickly reverse monetary tightening.
Julius Baer fixed-income analyst Afonso Borges said stronger growth has encouraged investors to believe that economies may be able to tolerate higher interest rates for longer.
Markets Scale Back Expectations for Rate Cuts
Investors have also dramatically changed their expectations for U.S. monetary policy.
Earlier hopes for interest-rate cuts have faded. Following last month’s rate increase, markets now expect at least three additional Federal Reserve hikes before the middle of 2027.
Softer U.S. inflation data released on Wednesday reduced expectations for an immediate rate increase, but the broader outlook remains tilted toward tighter monetary policy.
Inflation data in Europe has also been hotter than expected.
The European Central Bank has already raised interest rates twice this year, while financial markets currently price in three additional 25-basis-point increases by mid-2027.
Bonds Take the Biggest Hit
Stocks and credit markets also showed signs of nervousness on Thursday, but government bonds absorbed most of the selling pressure.
Credit-risk indicators also deteriorated.
An index tracking credit default swaps on high-yield, or junk, bonds climbed to its highest level since early April. These instruments are commonly used to protect investors against the risk of corporate defaults.
With inflation pressures remaining elevated, economic growth holding up and central banks maintaining tighter monetary policy, global bond markets could remain a major source of volatility for investors.
