Investor angst over stubborn inflation, unsustainable government deficits and rampant spending on artificial intelligence helped send borrowing costs to multiyear highs across the world this week.
The yield on the 30-year U.S. Treasury bond rose on Tuesday to 5.3 percent, its highest level since 2007. Similar bonds in Canada, Japan, Germany and elsewhere also traded at their highest yields in at least a decade.
The yields underpin interest rates on long-dated consumer borrowing like mortgages, with the rise adding to everyday citizens’ concerns over affordability that have taken hold both domestically and abroad.
That is a problem for government leaders, including President Trump, whose administration has pointed to bond yields as a barometer of success in improving affordability. So far, Mr. Trump has shown no signs that he is willing to ameliorate two of the drivers of rising yields by either taking aggressive steps to rein in government borrowing or quickly ending the war with Iran, which had been contributing to elevated fuel prices and inflation.
A shaky cease-fire between the United States and Iran officially ended on Monday, dimming the prospects for a reopening of the Strait of Hormuz, a critical waterway for shipments of oil and gas from the Persian Gulf.
When bond yields rise, it means prices are falling, and investors have worried for some time that increasing government spending could lead to a serious predicament, in which the government still needs to borrow money but investors are unwilling or unable to lend it.
Few analysts and investors have said they believe such a tipping point is imminent, but knowing exactly when or how it will occur in financial markets is practically impossible to predict, leaving investors — and policymakers — on edge.
Matt Eagan, a portfolio manager at Loomis Sayles, said that “everyone knows” that fiscal spending is unsustainable. The government’s total debt is approaching $40 trillion, up roughly $5 trillion in two years.
“You are on a bus called the 30-year bond and there is a cliff coming, but you don’t know if it is 100 meters away or 100 miles away,” he said. “You are hoping you can get off the bus before it crashes. That is the conundrum we face.”
When Mr. Trump initially announced his tariffs last year, yields jumped sharply higher. The president quickly paused his sweeping tariffs in April last year, after he described the bond market as getting “yippy.”
Mr. Trump has not indicated any similar reversal on Iran and on Tuesday said there were no open conversations taking place with the country’s officials.
The latest climb in yields has been more slow and steady, creating less immediate panic. And despite a disconcerting drop in the stock market on Tuesday, major indexes remain close to their record highs.
Still, the U.S. Treasury recently stepped in to support Japan’s currency from weakening, with analysts noting that the move may have been part of an effort to prevent Japan from selling its large holdings of Treasuries, which would have pushed U.S. yields higher.
Fears have been amplified by a spate of borrowing by some of the biggest technology companies in the world, as they fund the build-out of A.I. infrastructure. Some analysts say the debt is drawing buyers away from the Treasury market — meaning there is less demand for Treasuries, which contributes to higher yields. But others say the A.I. debt binge is also fueling spending in the economy, driving growth and inflation expectations, also pushing yields higher.
Geopolitical shocks — such as the Iran war — have added new worries over volatile oil prices and stubborn inflation, intensifying concerns in the bond market.
Alongside unorthodox interventions in foreign markets, Treasury Secretary Scott Bessent has sought to limit the pressure on longer-dated Treasury yields by moving much of the government’s new borrowing needs into short-dated “bills” that mature in less than one year. Other governments around the world have pursued similar measures.
There are risks to this strategy, too, because it makes the country’s debt costs more intertwined with short-dated interest rates controlled by the Federal Reserve.
That means that the rise in interest rates to combat inflation could come with a sharp increase in the government’s borrowing costs.
“Bessent is reaching for norm-breaking tools to bring down the borrowing rate,” noted analysts at Eurasia Group.
Analysts and investors have long warned that without more decisive action from Congress to reduce government spending, these measures merely buy more time, rather than present a solution.
Already Japan’s currency has started weakening again. And on Tuesday, the country’s 30-year bond hit its highest yield on record since the country began issuing 30-year bonds in 1999.
