As yields are dragged higher in the UK, Europe and Japan, the impact for consumers and businesses will be far-reaching
‘Starve the beast’? The $40tn cost of Republicans’ false promises to cut spending
Government borrowing costs around the world have surged to the highest levels in decades amid growing fears over US bond market turmoil.
Anxiety about Donald Trump’s handling of the US economy, and concern that the US president’s war with Iran is driving up inflation, are causing a sell-off in the US bond market.
Highlighting the world economy’s dependence on US stability, the yield – in effect the interest rate – on UK, French, German and Japanese government debt has been dragged higher.
Here we look at the factors driving the bond market, and the likely consequences.
Long-term US government borrowing costs have risen to the highest level since 2007, with the 30-year Treasury bond yield trading above 5%.
A bond is a form of loan that investors make to a borrower, or bond issuer. The yield represents the money an investor receives for owning the debt as a percentage of its current price. Prices fall when investor demand wobbles, which pushes up yields.
Against this backdrop, the US Treasury secretary Scott Bessent said this week that Washington would at least double its purchases of long-term US bonds in an attempt to assuage investor concerns. Washington also staged a joint intervention this month with Tokyo to prop up the value of the Japanese yen.
Bessent’s intervention on Wednesday helped to push down yields, but the impact was only temporary: they were rising again on Thursday, reversing most of that early move.
With US Treasury bonds a lynchpin in global financial markets, the rise in US borrowing costs has dragged yields higher for other countries. G7 nations have faced among the sharpest increases: UK 10-year bond rates are close to the highest since 2008 and 30-year rates are near 1998 levels; Germany’s are at 2011 levels and France at a 16-year peak. Japanese borrowing costs have also hit the highest level since 1996.
The breakdown of negotiations in the US-Israel war on Iran is the main source of investor unease. The US national debt hitting $40tn (£29.3tn) for the first time – after having doubled over the past decade – is also stoking fear that Trump’s tax and spending plans are unsustainable.
The stop-start fighting in the Middle East has pumped up the oil price, adding to worries over inflation and the hit to economic growth worldwide.
Inflation is bad news for bond investors. This is because it undercuts the future value of money received for owning the debt, so investors demand a higher yield to compensate for the risk.
In response to the inflation shock, the world’s most powerful central banks are also increasingly expected to raise interest rates. However, the unpredictable nature of the Iran war, and of the Trump administration, are making the challenge tougher.