Government borrowing costs across major economies have climbed to the highest levels in decades as turmoil in the US bond market triggers a global sell-off. The yield on 30-year US Treasury bonds, a benchmark for global borrowing, has risen above 5% for the first time since 2007, reflecting investor anxiety over inflation, geopolitical risks and fiscal sustainability.
The surge in US borrowing costs has spilled over into other markets, pushing yields higher for UK, French, German and Japanese government debt. In the UK, 10-year bond rates are nearing 2008 peaks, while Germany’s yields have climbed to 2011 levels. France’s borrowing costs have reached a 16-year high, and Japan’s have not been this elevated since 1996. The US Treasury secretary, Scott Bessent, announced plans to at least double purchases of long-term US bonds this week in an attempt to stabilize the market, following a joint intervention with Japan to support the yen.
The breakdown of US-Israel negotiations on Iran has intensified concerns, with the conflict driving oil prices higher and stoking inflation fears. Investors are demanding higher yields to compensate for the erosion of future returns caused by rising prices. The US national debt, now exceeding $40 trillion, has also heightened worries over the sustainability of tax and spending policies under the Trump administration.
Central banks face a delicate balancing act as inflation pressures mount. The unpredictable nature of the Iran war and US political risks have complicated monetary policy decisions. Société Générale analyst Albert Edwards noted that investors are frustrated by the lack of clear guidance from the Federal Reserve, with new chair Kevin Warsh eschewing traditional forward guidance.
Political uncertainty in other major economies is adding to the strain. In the UK, Prime Minister Andy Burnham’s handling of fiscal policy has drawn scrutiny, while France prepares for an election year in 2027 amid deepening political divisions. Japan, meanwhile, is grappling with elevated debt levels and a weakening yen, despite aggressive government spending.
The rise in borrowing costs is expected to ripple through economies, increasing mortgage, loan and corporate bond expenses. Governments, already burdened by high debt levels from recent economic shocks, face tighter fiscal constraints. Société Générale estimates the UK’s borrowing cost surge could erase roughly half of the £23.6 billion fiscal headroom set aside in the spring budget, complicating spending plans.
Analysts warn of a potential doom loop, where higher debt servicing costs crowd out productive spending, weakening economic growth and tax revenues, further straining budgets. The US’s traditional financial dominance, underpinned by the dollar’s reserve currency status, is also being tested by trade policies and expansive fiscal measures.
The path forward hinges on several factors: the trajectory of the Iran war, potential shifts in US tax and spending policies, further market interventions, and central bank responses. Investors will be watching for signals of easing geopolitical tensions or reassurance from policymakers. However, some warn that the current conditions mirror those preceding past financial crises, raising the specter of a market accident.
