Why Bond Markets Rattle Rich Politicians

This is not an abstract financial problem of interest only to a narrow circle of traders and analysts—it directly impacts fiscal policy, the ability of governments to fund new initiatives, and, ultimately, the welfare of citizens, as a significant portion of global capital is reallocated through debt markets.

The catalyst for concern in financial circles was a decision by the US Treasury. On August 19, the department announced that starting in September, it would increase its buybacks of long-term bonds—effectively stepping into the market to purchase the very long-term debt whose yields are soaring. Deutsche Bank analysts interpreted this move as a clear sign that the administration is seriously concerned about yield levels and is prepared to employ direct market interventions to quell rising tensions.

The figures confirm these negative trends. On August 18, the yield on 10-year US Treasury bonds reached its highest level since January 2025, while the 30-year yield briefly breached the 5.3% mark—a level unseen since 2007, prior to the global financial crisis. This is not an isolated American phenomenon: similar dynamics can be observed across virtually all major advanced economies. Long-term bond yields in the UK, France, and Germany are at levels not witnessed in over a decade. In Japan, a country renowned for decades of ultra-low and even negative interest rates, 30-year government bonds have edged close to all-time highs. In other words, this is a global, synchronized movement rather than a local anomaly in a single market.

The first group of drivers behind the rise in yields relates to traditional inflation expectations and the ongoing energy shock. The bond market operates on fundamentally different principles than the stock market: it is far more sensitive to news descending from the "political Olympus." Against this backdrop, a significant geopolitical factor persists: the Strait of Hormuz, through which a substantial portion of global oil supplies passes, remains virtually closed. This keeps fuel prices elevated, with diesel being particularly vulnerable—a fuel critically important for global logistics, freight transportation, and consequently, the cost structure of virtually all goods.

National inflation data are equally telling. In the UK, annual inflation in July stood at 2.9% compared to 2.6% in June—a notable acceleration driven primarily by rising energy costs. In the United States, the situation is somewhat different: core inflation slowed down, yet traders still pared back their bets on future interest rate cuts by the Federal Reserve following remarks by the new Fed Chair, Kevin Warsh. This is an intriguing paradox: while disinflation should typically push bond yields down, uncertainty regarding future policy direction and the rhetoric of the regulator's new head outweighed this effect, leading the market to price in a more cautious scenario.

The second significant driver of rising yields is unprecedented competition for capital from the corporate sector, largely fueled by the technological boom surrounding artificial intelligence. In recent months, major tech companies have issued approximately $75 billion in corporate bonds, directing these funds toward building data centers required for training and running AI models. According to Goldman Sachs estimates, the aggregate volume of such issuances nearly doubled compared to the previous year—a rate of growth that would have seemed fantastical just a few years ago.

Remarkably, the boom has not been confined strictly to the tech sector itself. Roughly 40% of mega-issuances exceeding $10 billion by investment-grade issuers came from "non-tech" corporations. This implies that the excessive demand for capital generated by AI investments is cascading across adjacent sectors—power equipment manufacturers, construction firms, semiconductor suppliers, and others. Consequently, an abundance of high-grade corporate bonds has flooded the market, intensifying overall competition for capital: sovereign issuers must now compete with corporations for the same institutional capital pools, compelling governments to offer higher yields to remain attractive.

Many market participants now conclude that the AI boom will continue to exert upward pressure on interest rates across the board. While the dynamics of the debt market were previously governed primarily by central bank decisions and government fiscal policies, a powerful new actor has now entered the fray: the private sector, financing AI infrastructure on an unprecedented scale.

The third, and perhaps most fundamental, reason is cumulative anxiety regarding escalating defense spending, soaring public debt levels, and fiscal deficits. Analysts cite this factor as the primary structural driver of current trends, as opposed to inflation and corporate competition for capital, which are more cyclical in nature.

The scale of the problem is illustrated by US figures: the US federal debt has surpassed the $40 trillion threshold for the first time in history, accounting for approximately 130% of the country's GDP over the past year, while the budget deficit hovers around 6% of GDP. By comparison, just a decade ago, such debt levels were considered an extreme scenario, discussed only in the context of crisis-ridden peripheral Eurozone economies rather than the world's largest economic powerhouse.

At the same time, markets price these risks unevenly—depending on the specific country and investor confidence in its fiscal policy. Tellingly, the 10-year yield spread between French and German bonds has reached its widest level since 2012—the height of the European sovereign debt crisis. This demonstrates that investors are increasingly differentiating even among Eurozone members, once perceived as a more or less homogeneous bloc sharing a common currency and comparable risk profiles.

Even more symptomatic is the shift in the global hierarchy of sovereign borrowers: markets now demand higher yields on Japanese government debt than on Chinese sovereign bonds. Not long ago, such an inversion would have seemed nonsensical—Japan was traditionally seen as the benchmark for ultra-low rates, while Chinese debt carried higher risk premia due to a closed financial system and tight state control. This reversal speaks volumes about how profoundly investors are re-evaluating the fiscal sustainability of traditionally "safe-haven" advanced economies.

The key reason for this re-evaluation lies not so much in the debt figures themselves as in the political will to rectify them. Investors in France and Japan increasingly proceed from a simple and rather pessimistic assumption: most politicians simply lack the resolve to adopt unpopular measures—such as deep spending cuts or tax hikes—required to stabilize the debt trajectory. And where the market perceives an absence of political will for discipline, it prices in a risk premium regardless of formal macroeconomic indicators.

The apprehension of governments and central banks is compounded by the fact that their policy toolkit is noticeably depleted, far more constrained than it was in 2008 or 2020. Back in June, the Federal Reserve highlighted an important structural shift in the composition of Treasury holders: a transition away from "relatively price-insensitive" official holders—principally foreign central banks and sovereign wealth funds that historically bought US debt for strategic rather than purely commercial reasons—toward far more price-sensitive private investors. This structural change inherently pushes yields upward, regardless of high-frequency macroeconomic data.

In response to the rising cost of long-term borrowing, the US, the UK, and Japan have opted to increase the issuance of short-term bills, where yields are noticeably lower. The logic is straightforward: borrowing short-term is cheaper than issuing long-term debt. However, this strategy carries an obvious downside—it drastically increases the frequency with which the sovereign must refinance its debt. Consequently, it heightens the risk of massive debt roll-overs coinciding with periods of historically high interest rates, which could trigger a full-blown fiscal shock if market conditions fail to improve by then.

A second potential tool is the outright purchase of government debt by central banks—essentially a form of quantitative easing. Here, however, a conceptual contradiction arises: many central banks have long and consistently pledged to shrink their balance sheets, already bloated from the pandemic era, rather than expand them anew. Executing a U-turn and resuming bond purchases would amount to a tacit admission of failure in their balance-sheet normalization strategy; hence, regulators are willing to deploy this mechanism only with extreme caution and in cases of acute necessity.

Interventions such as the long-term bond buybacks announced by the US Treasury can offer markets only a temporary reprieve. While they demonstrate the authorities' willingness to act, they are unlikely to reassure investors of any fundamental improvement over the long haul—especially while structural challenges regarding deficits, debt overhang, and energy shocks persist.

For policymakers, this dilemma forces a stark choice devoid of comfortable options. The first path entails a genuine demonstration of fiscal discipline: cutting budget deficits, implementing unpopular structural reforms, raising taxes, or slashing spending. All of these measures are politically painful and threaten to cost incumbents the support of electorates, particularly in nations accustomed to extensive social welfare programs. The second path is to accept higher borrowing costs and maintain business-as-usual fiscal policy; however, the fiscal space for new spending initiatives—whether infrastructure projects, defense outlays, or social entitlements—shrinks dramatically as an ever-growing share of government revenue is consumed simply by servicing accumulated debt.

Taken together, these observations paint a rather unsettling picture. The surge in long-term bond yields is not a technical anomaly of an isolated market, but a symptom of the convergence of several large-scale forces: a geopolitically driven energy shock, unprecedented corporate hunger for capital spurred by the AI investment boom, and, most crucially, profound structural doubts regarding the fiscal solvency and sustainability of the world's major advanced economies. Meanwhile, traditional policy levers for cushioning such shocks—direct bond purchases, shifting issuance to shorter tenors, central bank interventions—are either constrained in scope or create new vulnerabilities in place of those they resolve.

On the whole, the concerns raised by the authors can be endorsed and viewed as a timely warning of impending turbulence across global financial markets. What lends particular urgency to this dynamic is that it unfolds against the backdrop of a broader, secular trend: the growing fragmentation of the global economy, wherein established hierarchies (determining who counts as a "safe" borrower and who is "risky") are eroding and being reassessed in real time before investors' eyes.

Author: Doctor of Economics, Professor at the Department of World Economy and International Finance, Faculty of International Economic Relations, Financial University under the Government of the Russian Federation Igor Borisovich Turuev.