Bond yields at 20-year peak as debt worries grip markets

A global bond selloff pushed yields on U.S. Treasuries to levels not seen in two decades. The move spread to government bond markets in the U.K., France, Germany, and Japan. Traders and economists said it reflected a reassessment of fiscal sustainability.

For years, warnings about rising U.S. debt and interest costs were ignored. Last week's yield surge suggested that patience had run out, several analysts said.

"When does debt become unsustainable? When the global financial markets say it is," RSM Chief Economist Joseph Brusuelas said in a note. "That appears to be happening."

The selloff had multiple triggers. Higher oil prices after a breakdown in U.S.-Iran talks added to inflation fears. Federal Reserve Chairman Kevin Warsh offered no forward guidance on how the central bank might respond to future inflation, leaving investors uncertain about the rate path. Governments continued to spend as if borrowing costs were still at emergency levels, even as interest rates climbed sharply.

Robin Brooks, a senior fellow at the Brookings Institution, said in a post that it looked like markets had finally lost patience with high public debt.

The concerns were not limited to the U.S. Yields in the U.K., France, Germany, and Japan all rose as investors demanded higher compensation for holding government bonds from countries running large deficits. The coordinated move showed that the reassessment was global, traders said.

The Treasury Department responded by announcing an increase in buybacks of long-dated bonds. Yields fell briefly before rising again. Traders described the move as insufficient, saying it could not reverse the broader shift in market sentiment.

Brusuelas pointed to what he called an "elephant in the room": economic populism from both political parties. More spending from the left, tax cuts from the right. Both, he said, tolerate higher inflation and resist central bank efforts. "If such policies go on long enough without a course correction, banking and currency crises tend to follow," he warned.

Analysts at Capital Economics said in a note that bond investors are demanding greater compensation for fiscal and geopolitical uncertainty. They described the shift as persistent, not temporary. The higher term premium, the extra return investors require for holding long-dated bonds, is "fundamentally warranted," they said. They predicted that term premia would stay elevated and that bond markets would remain prone to volatility in the next few quarters.

The selloff also coincided with a shift in borrowing patterns. Hyperscalers, such as Microsoft and Amazon, have increased their bond issuance to finance capital spending on AI infrastructure. That adds to competition for dollars in the fixed-income market, crowding out some investors, according to a trader at a primary dealer.

This is playing out in an economy that looks stronger than it did during the pandemic years. The job market is tight and corporate profits are high. The AI boom is pouring hundreds of billions of dollars into investment. Under normal conditions, such strength would shrink deficits through higher tax revenue. Instead, deficits remain wide because spending has grown even faster, Brusuelas said.

Rating agencies have cut or warned about the U.S. credit rating over the past year. Foreign central banks, particularly in China and Japan, have reduced their holdings of U.S. Treasuries, Treasury data show. Several traders said those factors had been building for months. The bond selloff brought them all together.

The selloff was not triggered by a single event. It was the result of years of deficit spending and rising debt costs, amplified by new pressures from oil and AI investment. The market finally said enough.