By Dhara Ranasinghe, Gregor Stuart Hunter and Samuel Indyk
LONDON, Aug 18 (Reuters) - Long-term borrowing costs from the U.S. to Germany and Japan hit their highest levels in decades on Tuesday due to ballooning government debt and geopolitics, raising borrowing costs for companies and households and complicating policy.
Bond markets are entering an era where the inflation and interest rate outlook is more uncertain and the upside risks are greater, as U.S. President Donald Trump’s policies — from
tariffs to war — upend the global order.
Debt levels in developed countries are reaching levels that look increasingly unsustainable, with the U.S. debt pile nearing $40 trillion. The war in Iran is dragging on, pushing up oil prices and inflation and hitting global growth.
In addition, massive borrowing by technology companies to fund a buildout of artificial intelligence infrastructure is competing with demand for government bonds.
Taken together, that means the post-financial crisis period of low rates and subdued inflation might be behind us, said Kjersti Haugland, chief economist at investment bank DNB Carnegie.
"It coincides with the very high level of government debt in many countries, particularly Japan, the U.S., France and the UK," she said.
Thirty-year bond yields in the United States, the world's deepest and most systemically crucial government bond market, hit their highest since 2007 as oil prices rose back above $90, fanning inflation worries as U.S.-Iran peace hopes faded.
In Japan, inflation angst and expectations that Japan could hike interest rates as early as September pushed 10-year borrowing costs to a three-decade high just under 3%.
In Europe, Germany's 10-year Bund yield touched its highest since 2011, French yields were at their highest since 2008 and Britain's 30-year borrowing costs neared peaks hit in May that marked the highest levels since 1998. When a bond's yield rises, its price falls.
Rising yields hit other assets, with major stock markets such as Nasdaq and Europe's STOXX 600 in the red on Tuesday.
The selloff in government bond markets matters because the repercussions ripple through economies. Sovereign debt sets the benchmark for borrowing costs for companies and other loans, including household mortgages.
ENTERING A DANGER ZONE?
Competition for capital from AI hyperscalers — the technology giants building huge data centres — has coincided with rising budget deficits and, in the United States, concern about clear communication from the Federal Reserve under new Chair Kevin Warsh, have exacerbated the selling, analysts said.
For some, the higher yields reflect investor worries about how risky the securities have become because of the growing debt pile and uncertainty over policymaking, more than inflation concerns per se.
The New York Fed estimates that the additional compensation that investors require for lending to the government for 10 years — at around 80 bps — is close to its highest level in 12 years.
U.S. 10-year Treasury yields, at around 4.73%, are now trading at levels that in the past have attracted the attention of U.S. officials, with 5% now in focus.
"This will be very important, not just for bond markets, but also other financial assets as any break higher is likely to undermine confidence," said Zurich Insurance Group's chief market strategist Guy Miller.
"Given the importance of this level, we are likely to see it defended by the U.S. Treasury."
A Treasury spokesperson did not immediately respond to a request for comment.
What's more, analysts reckon the Treasury's unusual decision to sell euros and not dollars in recent joint intervention with Japan to bolster a weak yen suggests it does not want bond market strains worsened by foreign central banks selling Treasuries to fund currency-support operations.
Foreign holdings of U.S. Treasuries slid in June, Treasury Department data showed on Monday, led by declines in the holdings of Japan — the biggest foreign holder of U.S. bonds — the UK and China.
Two recent Treasury auctions also drew attention for their yields as the sale of 10-year notes cleared at a yield of 4.683%, the highest in 19 years, while the 30-year bond auction stopped at 5.216%, a 25-year peak.
Rising tariff refunds have meanwhile put U.S. public finances under further strain, after the Supreme Court struck down the emergency tariffs imposed by Trump last year.
CHANGING DYNAMICS IN JAPAN
Rising bond yields in Japan, where 30-year borrowing costs are just above 4%, are also starting to draw in Japanese investors, traditionally big buyers of U.S. debt, creating another headwind for the U.S. bond market.
Charu Chanana, chief investment strategist at Saxo Bank in Singapore, said the move in Japanese bonds makes them more attractive, making it harder for Washington to count on foreign demand.
For some bond investors, rising yields were making the market attractive, which could support prices from here.
“We are long on duration. I don't expect it (the current bond selloff) will last," said Pictet senior investment adviser Christopher Dembik.
Still, in Europe, where high government spending and debt have weighed on France and Britain, concern that climate events will add to spending pressures has also been a factor.
“It's not just oil that people are looking at, but there's a broader inflation picture that kind of keeps the ECB (European Central Bank) hawkish," said ING senior rates strategist Benjamin Schroeder.
(Reporting by Dhara Ranasinghe, Samuel Indyk and Harry Robertson in London, Stefano Rebaudo in Milan, and Gregor Stuart Hunter in Singapore and David Lawder in Washington; Editing by Elisa Martinuzzi, Susan Fenton and Hugh Lawson)
