Global bonds were engulfed by heavy selling again on Thursday, with borrowing costs for governments from the US to France and Japan surging to levels not seen in decades and stocks shaken as the turmoil began to spill into broader markets.
The 10-year US Treasury yield, a yardstick for global borrowing costs and asset prices, rose to 5.34%, its highest since 2002, having posted its biggest quarterly rise this century in the three months to September.
The relentless rise in yields, which threatens to further squeeze strained public finances, is also starting to hurt equity markets. European shares were hit particularly hard, with the benchmark STOXX 600 index touching its lowest since June and bank stocks tumbling. S&P 500 futures were a fraction higher, however.
Yields, which rise when bond prices fall, have surged globally as soaring energy costs fan inflation and as the boom in AI and data centre building lifts expectations about economic growth and where short-term interest rates will settle.
Higher rates raise financing costs for companies and mortgage borrowers and force governments to spend more on interest payments, with less left over for anything else.
BIG BORROWERS’ BONDS GETTING SOLD
France is among more indebted countries that have seen the biggest selloffs. The government is presenting its 2027 budget bill on Thursday but could struggle to get unpopular belt-tightening measures through parliament.
After turning in its worst quarterly performance since 1987 between June and September, the yield on the French 10-year note briefly jumped on Thursday by a further 10 basis points to 4.96%, closing in on the symbolic 5% level.
“French OATs are getting beaten up because it’s budget time and it’s messy,” said Tim Graf, head of macro strategy for EMEA at State Street.
The gap between French and German 10-year borrowing costs is at its highest since the euro zone debt crisis of the 2010s, and the cost of insuring France’s debt against the risk of default is at its highest since 2013.
But the upward pressure on yields is global.
Britain’s 30-year government bond yield rose above 6% to its highest since 1998 on Thursday, and data showing the slowest growth in house prices in nearly two years pointed to the impact of higher rates on the real economy.
In Japan, where inflation is taking hold after a decades-long battle with deflation, sovereign yields have notched an unprecedented fifth consecutive quarter of double-digit gains.
NO END IN SIGHT
Worryingly for governments and other borrowers, there is little on the horizon that could stem the yield surge.
Graf said State Street’s data showed minimal interest among institutional investors in buying longer-dated debt in the last 18 months.
The Washington-based Institute of International Finance recently estimated that over the past year, advanced economies paid more than $3.3 trillion in interest on internationally traded government bonds alone — more than the estimated $2.6 trillion of global spending on AI, $3.1 trillion on defence or $2.3 trillion on clean energy.
While European inflation data on Wednesday came in above expectations, the US reading cooled a touch.
“There is more than inflation that has bond investors worried these days. Even a milder US inflation print, therefore, is not enough to turn the narrative,” said HSBC’s chief Asia economist Fred Neumann.
“After years of missing their inflation target, many central banks will need to move more decisively to rebuild their credibility. Until that monetary tightening is delivered, bond markets will demand a premium for longer-term borrowing.”
Traders have scrambled to reverse earlier expectations for US interest rate cuts this year. After a hike last month, they now expect at least three more Federal Reserve hikes before the middle of 2027.
The European Central Bank has raised rates twice this year and markets price three further 25-basis-point increases by mid-2027.
CAN STOCKS HOLD UP?
Good economic growth data globally is also part of the picture. Factory activity across Europe and Asia expanded last month, giving central banks little reason to worry about the consequences of tightening policy.
“Stronger growth has encouraged markets to conclude that the economy can sustain higher rates for longer,” said Julius Baer fixed income analyst Afonso Borges.
That helps explain the resilience in stocks and other assets, though there were some signs on Thursday this could be changing.
European banking stocks fell as much as 3%,, while in credit markets, an index of junk bond credit default swaps, which protect against the risk of default, hit its highest since early April.
“We should be seeing other assets depreciate in price,” said Andrew Lilley, chief rates strategist at Barrenjoey in Sydney.
“It is over to them now.”
(Reporting by Tom Westbrook in Singapore, Alun John, Dhara Ranasinghe and Vidya Ranganathan in London and Ankur Banerjee in Singapore; Editing by Jamie Freed, Amanda Cooper, Elisa Martinuzzi and Catherine Evans)