Long-dated bond yields across the globe have surged to multi-year highs, with 30-year US Treasuries reaching levels not seen since 2007, French borrowing costs hitting 2008 highs, and German peers trading at 2011 levels. While domestic factors play a role, structural forces are driving these global increases. Market participants, including Guneet Dhingra, Head of US Rates Strategy at BNP Paribas, warn that a lack of predictability in the US Treasury's debt management strategy could lead to higher borrowing costs, drawing parallels to the 2023 bond selloff.
Several factors are contributing to this bond sell-off. One significant, though less obvious, factor is the substantial increase in corporate credit issuance, which reached $1.6 trillion by the end of July, a $225 billion (or 22%) increase compared to the same period in 2025. Approximately $200 billion of this issuance is linked to hyperscalers, and to absorb such a large volume of debt, investors must buy less of other assets, pushing up yields. Concerns about rising inflation and government debt sustainability are also frequently cited, though their direct impact is debated. For instance, despite higher oil prices due to Middle East conflicts earlier in the year, and a recent increase in the market's forecast for the long-run level of fed funds (the highest since 2011, possibly influenced by AI's potential for an inflationary demand boom), these are not seen as the primary drivers.
Other contributing elements include increased US Treasury term premia, which have jumped over the last two months, possibly due to uncertainty surrounding the new Federal Reserve Chair Kevin Warsh's less communicative approach to monetary policy. Fiscal concerns, while perennial, are also a backdrop; though the US budget deficit at 6.9% in Q2 is not exceptionally high by post-GFC standards, and government interest costs at 16% of expenditures are below 1980s levels. However, BNP Paribas Asset Management remains cautious on US Treasuries for the latter half of the year due to inflation risks, fiscal uncertainty, and an unclear Fed policy outlook, recommending investors stay in risk assets like equities and high-yield credit rather than long-duration government bonds, unless a significant economic weakening or external shock occurs.
The impact on equity markets has been minimal so far, with the MSCI All Country World IMI gaining 1.8% since late June. However, there's a divergence: value-oriented indices have benefited (e.g., US Russell Value up 5.2%), while technology stocks have suffered (e.g., Nasdaq 100 down -1.9%), largely due to higher interest rates affecting the longer duration of their earnings. Despite the tech sector's recent drop, healthy corporate balance sheets and positive earnings outlooks suggest most companies can manage slightly higher financing costs, implying that once higher rates are priced in, tech stocks could recover as superior earnings growth reasserts itself.
