Explainer-What's behind the selloff in world bond markets?

Government borrowing costs across economies, from U.S. debt to mortgages, are at multi-decade peaks due to concerns over inflation, rising interest rates, and ballooning debt loads. Japan's 10-year bond yield hit a 23-year high, while Britain's 30-year borrowing costs and German and French 10-year yields have reached levels unseen in years.

The U.S. 30-year yield rose to its highest since 2007 in August. A spike in oil prices due to U.S.-Iran tensions is driving yields higher as traders brace for more rate hikes, exacerbating concerns about rising borrowing. U.S. government debt now exceeds $40 trillion, with debt as a share of economic output at or above 100% across the G7.

A hawkish speech by U.S. Federal Reserve Chair Kevin Warsh has also contributed to traders' rate hike expectations. Bond yields influence borrowing costs for governments, households, and companies, slowing economic growth. For instance, U.S. 30-year mortgage rates have hit a one-year high due to climbing yields. Higher yields can make stocks less attractive, and heavily leveraged hedge funds could face pressure.

A surge in bond sales to fund AI investments, totaling $220 billion by five major AI companies this year, is another factor pushing up bond yields. Analysts attribute the rise in bond yields to supply and demand, as increased borrowing needs lead to higher interest rates. The U.S. Treasury's bond buybacks initially stabilized the market, but long-dated yields have since risen again.

Central banks can intervene to limit rising borrowing costs, as the Bank of England did during the 2022 UK mini-budget crisis. However, simply ordering bond purchases may not suffice if governments fail to address debt or boost growth. Investors expect bond vigilantes to watch closely, as they seek to impose fiscal discipline on profligate governments by demanding higher yields.