Government borrowing costs in several advanced economies surged to levels not seen in decades on Tuesday as optimism surrounding an end to the conflict between the United States and Iran evaporated. The escalation in market anxiety follows the expiration of a ceasefire between Washington DC and Tehran on Monday night, which concluded without an agreement or any progress regarding the reopening of the Strait of Hormuz.
Adding to the market volatility, President Donald Trump issued a threat to bomb Oman should the nation interfere with ongoing negotiations. This rhetoric contributed to a rise in oil prices on Tuesday, with barrels climbing above $91. Investors are increasingly concerned that sustained energy price increases will drive inflation higher, ultimately forcing central banks to maintain elevated interest rates.
Fiscal pressures are further exacerbated by rising defense spending, which is expected to increase borrowing requirements for major European nations, including Germany and the UK. Market analysts also point to the substantial volume of new debt being issued by governments and corporations, including AI-focused firms, as a key driver of rising yields.
The financial impact was widespread across global markets. The yield on the 30-year US Treasury bond surpassed 5.33% on Tuesday, marking its highest level since June 2007, following gains made on Monday. Meanwhile, the 10-year US Treasury bond yield climbed above 4.74%. In Japan, the government bond yield rose 2.5 basis points to 2.945%, reaching a three-decade peak.
European markets mirrored this trend, with the UK’s 10-year gilt yield rising to 5.176%. Germany’s 10-year bond yield hit its highest point since 2011, while the equivalent rate in France reached a 16-year high. Bond yields rise when the price of the debt falls.
Dan Coatsworth, head of markets at AJ Bell, noted that rising long-dated bond yields reflect more than just interest rate expectations and inflation fears; they also indicate concerns over high levels of government borrowing and the compensation investors demand for holding long-term debt. Neil Wilson, an investor strategist at Saxo UK, echoed these sentiments, stating that fixed income investors are becoming increasingly nervous due to a combination of geopolitical conflict, inflation, and structural fiscal worries, noting that governments appear unable to curb spending while corporate capital expenditure on AI remains high.
