US Treasury yields hit highest since 2002 as global bond sell-off deepens

L Global bonds were
engulfed by heavy selling again on Thursday sending borrowing
costs from the US to France and Japan surging to levels not seen
in decades in a warning to policymakers.

Higher rates raise financing costs for companies and
mortgage borrowers and force governments to spend more on
interest payments, with less left over for anything else.

Bond yields, which rise when prices fall, have soared
globally as soaring energy costs fan inflation. The boom in
artificial intelligence and data-centre building have heightened
competition for capital and raised expectations about economic
growth and where short-term interest rates will settle.

The US 10-year Treasury yield, a yardstick for global
borrowing costs and asset prices, rose to 5.34%, its highest
since 2002 on Thursday having posted its biggest quarterly rise
this century in the three months to September.

And while dip buyers are stepping in, with the global
benchmark last around 5.32%, there could still be scope for
further moves.

"Financial markets are in the midst of a discovery process
to see where the new long-term anchor sits," said HSBC's chief
Asia economist Fred Neumann.

Markets were responding to years of above-target inflation,
he said and "until monetary tightening is delivered, bond
markets will demand a premium for longer-term borrowing.

"But it would be unfair to lay the blame entirely on
central bankers: in the end, it is expansionary fiscal policies
that are equally to blame for persistent inflation."

France is near the top of bond investors' minds. Its
government is presenting a 2027 budget bill on Thursday which
could struggle to get unpopular belt-tightening measures through
parliament.

In a sign of the challenge French 10-year borrowing costs
also hit their highest since 2002 on Thursday, trading close to
the symbolic 5% level after turning in its worst quarterly
performance since 1987 between June and September.

While French yields also retreated from their early highs,
the gap between French and German 10-year borrowing costs is at
its highest since the euro zone debt crisis of the 2010s, and
the cost of insuring France's debt against the risk of default
is at its highest since 2013.

The European Central Bank is even facing questions about
whether it might help shore up France's bond market, though
market players say this seems unlikely for now.

For sure, the upward pressure on yields and hence government
finances, is global.

The Washington-based Institute of International Finance
recently estimated that over the past year, advanced economies
paid more than $3.3 trillion in interest on internationally
traded government bonds alone — more than the estimated $2.6
trillion of global spending on AI, $3.1 trillion on defence or
$2.3 trillion on clean energy.

Britain's 30-year government bond yield rose above 6% to its
highest since 1998 on Thursday, and data showing the slowest
growth in house prices in nearly two years pointed to the impact
of higher rates on the real economy.

In Japan, where inflation is taking hold after a
decades-long battle with deflation, sovereign yields have
notched an unprecedented fifth consecutive quarter of
double-digit gains.

Good economic growth data globally is also part of the
picture. Factory activity across Europe and Asia expanded last
month, helped by AI related investments giving central banks
little reason to worry about the consequences of tightening
policy.

"Stronger growth has encouraged markets to conclude that the
economy can sustain higher rates for longer," said Julius Baer
fixed income analyst Afonso Borges.

Traders have scrambled to reverse earlier expectations for
US interest rate cuts this year. After a hike last month, they
now expect at least three more Federal Reserve hikes before the
middle of 2027, even if cooler inflation data on Wednesday
helped push back near-term expectations.

European inflation data this week has been hotter than
expected though, while the European Central Bank has raised
rates twice this year and markets price three further
25-basis-point increases by mid-2027.

But while assets from stocks to credit were jittery on
Thursday, the selling was far from that seen in bonds.

European stocks hit their lowest since June but were last
down just 0.5% while US stocks are set to open higher.

In credit markets, an index of junk bond credit default
swaps, which protect against the risk of default, hit its
highest since early April.

"I don't think we're necessarily yet at the point where
higher rates can act as a showstopper," said Chris Scicluna,
head of economic research at Daiwa Capital Markets.

"There's a lot of news out there still about earnings and
there's a lot of positive momentum still to come through from AI
related investments over the next couple of quarters."