How war, debt and the AI boom are pushing global bond yields higher? Explained | Today’s news
Bond markets are under tremendous pressure worldwide!
- U.S. Treasury yields rose sharply, with the 10-year Treasury yield hovering around 4.8% — the highest level since 2023. But that’s only part of the story. It seems
- In Germany, the 10-year yield recently hit a level not seen since 2011.
- UK 30-year yield hits highest since 1998.
- In Japan, the yield on 10-year government bonds exceeded 3% for the first time since 1996.
The unrest is driven by several factors: First, the U.S. war with Iran is heating up again, raising U.S. defense spending and the prices of oil, gasoline, diesel, and jet fuel. Second, government borrowing. And the third factor influencing bond prices is AI spending. Here’s a look at how war, government borrowing and the AI boom are combining to put pressure on global bond markets.
War costs money!
The US-Iran conflict has pushed oil prices higher, with Brent crude recently trading around $95 a barrel and briefly approaching $100. Higher energy costs increase the risk that inflation will remain elevated for longer. Conversely, higher inflation expectations translate into higher bond yields as investors demand higher yields to compensate for the loss of purchasing power.
Now, “the bond market can stop panicking when the Fed starts panicking,” Art Hogan, chief market strategist at B. Riley Wealth Management, told CNN. “If the Fed shows it’s willing to start this fight against inflation, maybe Treasury yields will cool.”
Governments borrow a lot
The US national debt reached $40 trillion last month.
So far this fiscal year alone, it has spent $931 billion on net interest, well ahead of the $804 billion spent on national defense, according to the Treasury Department. According to the Peter G. Peterson Foundation, a fiscal watchdog group, net interest spending in the U.S. is expected to exceed $16 trillion over the next decade.
The UK and Japan also face concerns about government finances. Investors are increasingly demanding higher yields to absorb this supply.
An unexpected competitor: AI spending
Companies like Alphabet, Amazon, and Meta are spending huge sums on the data centers, chips, and other infrastructure needed to build AI businesses, and much of it is financed through the bond market.
Foreign private investors bought about $390 billion of U.S. corporate bonds over the past year, surpassing their $329 billion in government purchases, according to data cited by Business Insider.
The implications go far beyond bond traders. Higher government yields may push up mortgage and consumer credit rates, while more expensive corporate loans could ultimately make it harder for companies to finance new projects — including the massive build-out of artificial intelligence.
“We maxed out our credit cards. Why did Bessent’s plan fail?
Finance Minister Scott Bessent surprised markets with a controversial move to at least double the Treasury buyback, but the intervention flopped massively.
According to JP Morgan, Kelly said Bessent’s plan was to move a lot of the borrowed money. “Unless they find a way to really change the trajectory of our debt, the government can’t stop it. We’ve maxed out the credit cards.”
