Global bond markets are experiencing a significant sell-off, with yields on government debt surging to multi-year and even multi-decade highs across G-7 countries. This trend is primarily attributed to a combination of factors including escalating crude oil prices, renewed inflation concerns, and the likelihood of central banks, particularly the US Federal Reserve, continuing to raise interest rates. Brent crude has surpassed $96 a barrel amidst the US-Iran conflict, fueling fears of a prolonged supply crisis.
Investors are demanding greater compensation for holding longer-maturity debt due to these inflation and fiscal risks. The US 10-year bond yield has hit 4.8%, a level not seen since January 2025. Similarly, yields in the UK have reached their highest since 2008, Germany since 2011, and Japan's 10-year note crossed 3% for the first time since 1996. The US national debt exceeding $40 trillion also adds to market jitters.
Federal Reserve Chair Kevin Warsh's recent remarks at Jackson Hole have reinforced expectations of a rate hike, with the probability of a 25 basis point increase in two weeks rising to 67%. US Consumer Price Inflation has remained above the Fed's 2% target for 65 consecutive months. Higher bond yields make government debt more attractive compared to equities, as they increase the discount rate for valuing future corporate earnings. Despite this, Wall Street markets are still trading near record highs, not fully factoring in the impact of rising yields.
Adding to the bond sell-off is the sheer volume of corporate debt issuance, particularly by major tech companies investing in AI. The five largest hyperscalers have sold $159 billion in corporate bonds in the first half of this year, with projections for global big tech firms to issue $570 billion this year. This increased supply, coupled with major US treasury holders like Japan and China being net sellers, further pressures US yields. The surge in long-dated yields also implies potential increases in mortgage rates, posing challenges for households and corporate investment.
