Global government bond markets suffered a fresh wave of selling on Thursday, driving benchmark yields in major economies up to levels not seen for decades and stoking concerns across equity markets, credit spreads and already stretched government finances.
The yield on the U.S. 10-year Treasury - the principal reference for global borrowing costs - climbed to 5.34%, its highest reading since 2002. The move extends a brutal third quarter in which long-dated U.S. government debt recorded the largest quarterly rise in yields this century.
Market participants point to two central forces behind the repricing. First, a rebound in energy prices has renewed cost-push inflation worries. Second, an unprecedented wave of capital expenditure for artificial intelligence systems and data-center expansion has prompted bond desks to lift their assumptions for where neutral terminal policy rates will ultimately settle. The combined effect is a broad-based increase in borrowing costs.
That rate shock is cascading across the economy. Corporates face higher financing costs for new issuance and refinancing, mortgage borrowers are seeing borrowing rates move sharply higher, and governments are confronting ballooning debt-service obligations that strain sovereign balance sheets.
“Heightened tensions in the Middle East.. and sticky inflation are all feeding into government bond yields," said Russ Mould, investment director at AJ Bell.
France emerges as focal point of European stress
The sell-off has been particularly punishing for heavily indebted countries, with France at the epicenter of pressure on continental fixed income. After suffering its worst quarterly performance since 1987, the yield on France's 10-year OAT rose a further 10 basis points on Thursday to 4.96%, edging quickly toward the symbolic 5.00% level.
Credit-default swaps used to insure French sovereign debt against default spiked to their highest levels since 2013, reflecting investor concern about Paris's fiscal trajectory. Those concerns are heightened as Prime Minister Sebastien Lecornu prepares to present the government's 2027 draft budget later in the session, which aims to deliver around 54 billion in spending cuts.
France's fiscal metrics underline the challenge: the deficit is forecast to reach 5.4% of GDP this year while public debt is approaching 120% of GDP - a peak that has accumulated over the tenure of President Emmanuel Macron. International buyers are demanding higher compensation to hold French bonds, leaving the spread between 10-year French OATs and benchmark German Bunds near multi-year highs.
U.K. yields climb as pension and social costs mount
In London, long-dated U.K. gilts also rose. The 30-year gilt yield reached 6.00%, its highest level since February 1998. The move followed Britain's syndicated sale on Tuesday of new 10-year benchmark bonds, which were priced to yield more than any issuance of that maturity since 1999.
Investors note that the U.K. faces rising costs for state pensions and social programs, while political calls from figures such as Andy Burnham and other regional leaders for higher defence spending are adding to fiscal pressures.
Monetary expectations shift - rate cut hopes recede
The aggressive repricing has erased earlier market expectations for near-term interest-rate cuts. After a recent policy move, CME's FedWatch tool now prices in at least three additional Federal Reserve rate increases before mid-2027, despite a brief respite following softer August U.S. PCE inflation data.
Across the Atlantic, the European Central Bank has already implemented two rate hikes this year. Money markets are now anticipating three further 25-basis-point moves by mid-2027 to counter energy-driven price pressures, reinforcing a "higher-for-longer" monetary stance.
The rapid rise in global yields presents a broad set of challenges. Higher sovereign borrowing costs strain already-large public debt loads, elevated corporate funding costs can compress investment and hiring decisions, and higher mortgage rates exert pressure on the housing sector. Credit spreads are widening in places where fiscal or political credibility is questioned, raising the prospect of more acute stress in fragile sovereign balance sheets.
Investors and policy makers will be closely watching upcoming fiscal announcements and the evolution of energy prices as signals that could either calm or further unsettle sovereign debt markets.