US borrowing costs hit highest level since 2007

US government borrowing costs reached their highest level since 2007 after a surge in oil prices exacerbated inflation concerns. The effective interest rate on US government bonds with a 10-year maturity, known as the 10-year Treasury yield, surged to 5.04% before easing. The rise in global government bond yields has been attributed to worries that the oil price increase since the beginning of the US-Israel conflict with Iran could prompt higher interest rates.

The United States has been purchasing bonds to keep Treasury yields low, with Treasury Secretary Scott Bessent claiming the intervention was "successful." Global crude oil prices peaked at over $109 a barrel, up from around $86 at the end of August, due to renewed concerns about Saudi Arabia's oil exports following heightened tensions in the region.

Investors are expecting Federal Reserve Chair Kevin Warsh to raise interest rates to tame inflation driven by higher oil prices. However, US President Donald Trump opposes a rate increase, preferring lower rates to stimulate the economy. He had previously clashed with Warsh's predecessor, Jerome Powell, over his decision to maintain unchanged rates.

Higher interest rates and inflation generally push up the yields bond investors require for government borrowing. Bond yields can also signal investors' confidence in a particular government, with higher yields indicating lower confidence. Competition for debt among artificial intelligence (AI) firms is also contributing to rising yields.

Tech giants are borrowing large sums of money to construct vast data centers, which leads to increased interest rates on their debt, subsequently raising government bond yields. Carol Schleif, chief market strategist at BMO Wealth Management, noted that bond markets have been signaling for weeks that higher interest rates might be necessary.

While the recent rise in borrowing costs has been "orderly" this year, rather than abrupt, she added that rates could remain high if geopolitical tensions and high energy prices continue to dominate attention.