By Tom Westbrook and Amanda Cooper
SINGAPORE/LONDON, Sept 15 (Reuters) - Government borrowing costs hit their highest since the 2008 financial crisis on Tuesday, with 10-year U.S. Treasury yields now above 5%, increasing pressure on heavily indebted borrowers that so far have been shielded by resilient economic growth.
The average 10-year yield for the Group of Seven largest economies hit 4.285%, the highest since mid-2008 and a full percentage point above where it was prior to the start of the war
in the Middle East.
The widening conflict has sent oil back above $100 a barrel, which has heaped pressure on central banks to raise interest rates to tackle inflation - a major reason why bond yields are up. The Federal Reserve is expected to raise rates for the first time since 2023 on Wednesday, according to money markets, while the Bank of Japan is expected to hike on Friday, and the European Central Bank raised last week, and could deliver a string of rate increases over the coming months.
The bond selloff has raised the cost for governments to borrow new money, but also left them with higher interest bills that siphon funds from social, defence and other programmes, which in turn raises questions as to the sustainability of their debt burdens.
"Yields at 5% aren't a problem if you're growing 6.5%. But if you're growing 5% with yields at 5%, that might be a different story," Samy Chaar, who is chief economist at Lombard Odier, said.
The move in the 10-year Treasury yield above 5% is a headache for sovereign and corporate borrowers everywhere, given that it is a benchmark for virtually every other asset in financial markets.
And while the U.S. economy may be growing quickly enough to sustain 10-year borrowing rates above 5%, other countries are less well equipped to do so.
LACK OF VISIBILITY
The other problem that investors are dealing with is new Federal Reserve Chair Kevin Warsh's dislike of forward guidance, meaning uncertainty - and therefore, volatility - is picking up and investors are less willing to offer policymakers the benefit of the doubt.
“All central banks are now following this new era of no forward guidance, just building up credibility and trust. And as you can see now in the bond markets, that currently isn't working," Shriya Samarth, head of EMEA rates at market maker StoneX, said.
"You've got AI capex throwing a spanner in the works. You've got fiscal anxiety. US debt is now at $40 trillion. Historic high debt to GDP ratios in the UK and the euro zone, that's adding to complications," she said.
The 10-year Treasury yield hit a high of 5.041%, the most since 2007, earlier on Tuesday and traders were waiting to hear from U.S. Treasury Secretary Scott Bessent when he appears before Congress.
Global equities have surged this year, led by shares in the builders, suppliers and customers of the boom in artificial intelligence that has seen an explosion in capital expenditure and borrowing, but also in earnings growth.
Rising bond yields may not offset these positive catalysts for stocks, but they nonetheless pose a risk, Khoon Goh, ANZ's head of Asia research in Singapore, said.
"If yields keep rising, then there's bound to be further spillover effects," he said.
Bessent's Treasury Department has intervened in the markets in various ways in the past few weeks to contain the rise in longer-dated yields, from joint intervention to buy the yen to deter the Japanese government from selling U.S. bonds to do so, as well as upping the volume of paper the government will repurchase, but to little avail.
Part of this week's bond selloff, ANZ's Goh said, was also attributable to a shift in expectations for short-term U.S. interest rates.
Japan's 10-year bond yield hit a three-decade high above 3%.
In Germany, the 10-year benchmark yield sat near its highest since 2009 at 3.55%, while French 10-year yields were hovering near an 18-year high and UK 10-year yields, at 5.45%, are at their highest since 2007.
James Bilson, global fixed income strategist at Schroders, said fiscal policy and debt sustainability are crucial for bond markets and the current rise in U.S. yields is not yet a sign of increasing sovereign credit risk.
The cost of insuring U.S. sovereign debt against the risk of default, as reflected by credit default swaps, has fallen to its lowest since February, for example.
"Combined policy is too loose to deliver sustained 2% inflation," he said. "This, in one line, is the root cause of the current weakness in bonds. Solve inflation, and many other problems become much easier too."
(Additional reporting by Harry Robertson in London; Editing by Thomas Derpinghaus, Elisa Martinuzzi and Ros Russell)
