By Alun John, Tom Westbrook and Dhara Ranasinghe
LONDON/SINGAPORE, Oct 1 (Reuters) - Global bonds were engulfed in another sell-off on Thursday, squeezing already pressured government finances, as borrowing costs from the US to France, and Japan hit levels not seen in decades, spilling into broader markets including stocks.
European shares were hit particularly hard, with the benchmark STOXX 600 index down 1.2% to its lowest since June.
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.
Yields rise when bond prices fall, and have been surging around the world as soaring energy costs fan inflation and as the boom in AI and data centre building lift expectations for growth and for 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.
More heavily indebted countries' bonds are getting sold harder.
France's 10-year note has just seen its worst quarterly performance since 1987, and its yield jumped by a further 10 basis points on Thursday 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. Italian bonds are also getting whacked," Tim Graf, head of macro strategy for EMEA at State Street, said.
In a further sign of worries about France, the cost of insuring its debt against the risk of default rose to its highest since 2013.
Britain's 30-year government bond yield rose above 6% to its highest since 1998.
In Japan, where inflation is finally taking hold after a decades-long battle with deflation, sovereign yields notched an unprecedented fifth consecutive quarter of double-digit gains.
"It was the Treasury bear market that had to happen," said Andrew Lilley, chief rates strategist at Barrenjoey, an investment bank based in Sydney.
"We'd been persisting in this unstable equilibrium where core inflation was unsustainably high," he said.
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 are pricing three further 25-basis point increases by the middle of next year.
Analysts said there did not appear to be an immediate trigger for Thursday's move, with oil prices relatively contained above $100 a barrel and no new pieces of economic data spooking markets.
"We have had a prolonged selloff in bonds — they have been correlated with oil prices and also we've had strong US data. We don't have enough buyers who want to buy bonds and that's not helping," Rory McPherson, chief market strategist at Wren Sterling, said.
The bond selloff was also starting to weigh on other asset classes on Thursday. Banking stocks in Europe fell as much as 3%,, while in the credit 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; Editing by Jamie Freed, Amanda Cooper and Elisa Martinuzzi)
