Ankara:Global bond markets are experiencing a significant selloff, driven by high inflation, rate hike expectations, and chronic debt burdens. This situation is impacting households and companies and could threaten public finances.
According to Anadolu Agency, US economic growth exceeded expectations in the second quarter, but inflation remained above the Federal Reserve's 2% target. This has pushed the US 10-Year Treasury yield higher and led to a global stock selloff due to fears of further monetary policy tightening.
The key global borrowing cost indicator has hit 5.34%, a level not seen since 2002, with US Treasury bond yields rising around 90 basis points in the third quarter. Investors are selling more bonds as they anticipate the Federal Reserve will raise its policy rate by the end of October, amidst concerns of an overheating US economy.
Attention is focused on the upcoming September labor report, with markets expecting the US unemployment rate to stay at 4.1%. Meanwhile, the rate for a 30-year mortgage surpassed 7% for the first time since early 2025 due to rising bond yields.
Interest payments in major economies are now outpacing global investments in artificial intelligence (AI), defense, and clean energy, as reported by the Institute of International Finance (IIF). Tensions between the US and Iran are also contributing to rising oil prices, affecting inflation and interest rates, and exacerbating debt concerns.
The US has a total debt burden exceeding 40 trillion, while the debt-to-GDP ratio among G7 countries, excluding Germany, remains at or above 100%. AI investments are influencing the rising debt, with the top five AI tech firms issuing 220 billion in bonds this year for data center investments, increasing borrowing needs and pushing interest rates higher.
This bond surge is not just in the US; the UK's 30-year bond yield exceeded 6% for the first time since 1998, France's 10-year bond reached its highest since 2002, and Japan's yields also hit multi-decade highs. US Treasury Secretary Scott Bessent emphasized that these issues should not overshadow the American economy's overall strength.
The Treasury Department's plan to double its long-term bond buyback operations has supported market liquidity but hasn't alleviated bond market pressures. Experts urge investors seeking higher interest rates to practice fiscal discipline and curb excessive spending. Analysts suggest that a potential drop in oil prices might offer short-term relief, but long-term borrowing costs will only decrease if governments reduce their debt.
Bond market volatility is affecting the eurozone and foreign exchange markets, with Tim Waterer of KCM Trade noting that high bond yields will persist unless oil prices drop or the US and Iran resolve their issues. The macroeconomic pressure is increasing Europe's economic fragility.
Francesco Pesole from ING Group indicated that the French-German 10-year bond yield spread has reached 130 basis points after France's budget announcement failed to address structural deficits. The spread might widen to 150 basis points, adding pressure to the euro, which is expected to become more sensitive to these developments despite the resilient euro/US dollar exchange rate. Pesole mentioned that the exchange rate could fall to 1.110 if yield spreads continue to widen.