By Alun John, Dhara Ranasinghe, Ankur Banerjee and Gertrude Chavez-Dreyfuss
LONDON/SINGAPORE/NEW YORK, Oct 1 (Reuters) - Global bonds came under heavy selling pressure again on Thursday, sending borrowing costs from the United States to France and Japan to multi-decade highs and underscoring mounting concerns for policymakers.
Bargain hunters stepped in during the late US morning, however, helping the market stabilize. The US benchmark yield retreated to around 5.26%, as Treasury yields across the curve
declined. Still, analysts said there could be scope for further selling.
Higher rates raise financing costs for companies and mortgage borrowers and force governments to spend more on interest payments.
Bond yields, which rise when prices fall, have soared globally as surging energy costs fan inflation. The boom in artificial intelligence and data-center construction have increased competition for capital and raised expectations about economic growth and where short-term interest rates will settle.
The US 10-year Treasury yield, a yardstick for global borrowing costs and asset prices, earlier rose to 5.34%, its highest since 2002, after posting its biggest quarterly rise in yields this century for the three months ending in September.
"As yields have crept higher, that is going to tighten financial conditions and could increase the risk of a slowdown," said Danny Zaid, portfolio manager at TwentyFour Asset Management in New York.
"But fundamentals right now -- the broader economy -- still look very strong even though we do know that we have a K-shaped economy and the lower cohort has been suffering for quite some time and there is need for relief from higher oil prices."
A K-shaped economy refers to when the economy performs unevenly, with wealthier individuals thriving, while lower-income workers continue to struggle.
Markets are responding to years of above-target inflation, said HSBC's chief Asia economist Fred Neumann, who added that "until monetary tightening is delivered, bond markets will demand a premium for longer-term borrowing."
FRANCE IN FOCUS
France is near the top of bond investors' minds. Its government is presenting a 2027 budget bill on Thursday which could struggle to get unpopular belt-tightening measures through parliament.
In a sign of the challenge, French 10-year borrowing costs hit their highest since 2002 on Thursday, trading close to the symbolic 5% level after turning in its worst quarterly performance since 1987 in the September-ending quarter.
The gap between French and German 10-year borrowing costs is trading around 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.
The European Central Bank is even facing questions about whether it might help shore up France's bond market, though market players say this seems unlikely for now.
GLOBAL PRESSURE
For sure, the upward pressure on yields and hence government finances, is global.
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.
Britain's 30-year government bond yield rose above 6% to its highest since 1998 on Thursday. UK house prices are growing at their slowest rate in nearly two years, underscoring the effect of higher rates on the real economy.
In Japan, where inflation is taking hold after a decades-long battle with deflation, sovereign yields notched an unprecedented fifth consecutive quarter of double-digit gains.
STOCKS HOLD UP FOR NOW
Factory activity across Europe and Asia expanded last month, helped by AI-related investments. That has given central banks less 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.
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, even if cooler inflation data on Wednesday helped push back near-term expectations.
European inflation data this week has been hotter than expected though, while the European Central Bank has raised rates twice this year and markets price three further 25-basis-point increases by mid-2027.
While assets from stocks to credit were jittery on Thursday, bonds took the brunt of the selling. Credit concerns were also present in the derivatives market. An index of junk bond credit default swaps, which protect against the risk of default, hit its highest since early April.
(Reporting by Tom Westbrook and Ankur Bannerjee in Singapore, Alun John, Dhara Ranasinghe and Vidya Ranganathan in London; Editing by Jamie Freed, Amanda Cooper, Elisa Martinuzzi, Catherine Evans and David Gaffen)
