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Why has the pressure in global bond markets intensified?

Heavy selling in bond markets over the summer has pushed government borrowing costs in many countries close to their highest levels in decades. The new pricing in markets suggests governments will now have to pay more interest to raise cash.

The immediate trigger has been the prospect of the Strait of Hormuz remaining closed and the renewed escalation between the US and Iran. Those developments have pushed energy prices higher, reinforcing the view that inflation will stay elevated for longer and that interest rates in major economies will remain above expectations.

Markets had previously assumed tensions would ease before the US midterm elections in November and that oil and natural gas prices would soften. That scenario has failed to materialise, and investors have priced in higher energy costs, a deepening Gulf crisis and the possibility of tighter monetary policy for longer in bond prices.

It is not just governments — companies are hitting the same market

Geopolitical risk is not the only factor adding pressure. Major US technology groups such as Google, Amazon and Meta are also seeking hundreds of billions of dollars from the same bond markets to fund investment in artificial intelligence data centres.

Debt issued this year by US “hyperscaler” companies has climbed to more than $219 billion. Roughly a third of that was raised in non-dollar currencies, including sterling, while total issuance last year was $93 billion; in earlier years, the annual average was below $40 billion.

  • Some expectations suggest the tech giants’ total borrowing this year could reach $400 billion-$500 billion.
  • Rising corporate issuance is intensifying competition for the same investor pool as governments, pushing up the price of public borrowing.

What does the picture look like in Japan and other major economies?

Japan remains one of the most heavily indebted major economies relative to gross domestic product, while also standing as one of the largest creditors to the US Treasury. The Bank of Japan’s policy rate was near zero until recently, but rising inflation has pushed that level higher.

As a result, yields on Japanese government bonds have climbed to a 30-year high. A weaker yen has made the picture more complicated, while the view that global capital flows are undergoing a more structural shift has gained traction.

What risk are markets pricing most heavily?

The key message from investors is less about fears of outright default and more about how credible borrowing plans are. In market terms, if a country wants to borrow more without a strong plan — especially when there are questions about political stability — it has to accept higher interest rates.

Economists are also pointing to different factors. Mohamed El-Erian highlights the new competition created in bond markets by AI investment, while Lord Jim O'Neill argues that recent moves have been shaped by uncertainty over US policy and efforts to bring rising yields back down.

Why are costs being watched so closely in the United Kingdom?

In the United Kingdom, repeated changes of prime minister and chancellor, policy reversals and years of failure to deliver structural reform have added a further risk premium to government borrowing. Prime Minister Keir Starmer's attempt to reassure markets and lower costs by stressing stability had therefore taken on added importance.

Even so, the inability of the Labour Party to push through planned welfare cuts despite its large parliamentary majority has surprised markets and increased volatility in gilts, the UK government's bonds. According to assessments reported by the BBC, signs of faster growth than peers through 2026 and a recovery in consumer confidence are emerging, but the global bond sell-off is increasing pressure on the government's broader economic plans.

Lord O'Neill says the 10-year plan expected in November must spell out how overspending will be tackled. As interest rates rise, the political cost of choosing between infrastructure investment and social spending is also getting heavier.

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