Why are world bond markets selling off again?

World bond markets are experiencing a sell-off due to concerns over inflation and rising interest rates. The 10-year US Treasury yield hit 5.34% on Thursday, its highest level since 2002, with the biggest quarterly increase in the last decade. Similar trends are seen in French 10-year bond yields and Japanese bond yields, which are at multi-decade peaks.

This comes after a surge in oil prices triggered by US-Iran tensions, causing elevated inflation and heightened concerns about inflation and central bank policies. The US national debt now exceeds $40 trillion, while debt as a share of economic output in G7 countries, excluding Germany, is at or above 100%. Investors argue that lasting relief requires lower debt burdens or stronger economic growth.

The surge in bond sales to fund AI investments is also contributing to the rise in bond yields. While some governments, like the US Treasury, have announced bond buybacks to limit borrowing costs, the long-dated bond yields continue to rise. Central banks can also intervene by buying bonds, as the Bank of England did during the 2022 UK mini-budget crisis.

However, analysts argue that bond yields will only decrease durably once governments address their debt or boost economic growth. Bond vigilantes, or investors seeking to impose fiscal discipline on governments, remain on alert, expecting higher compensation for buying bonds until inflation is contained.