How War, Debt And The AI Boom Are Pushing Global Bond Yields Higher? Explained

(MENAFN- Live Mint) The bond markets are under tremendous pressure globally!

US Treasury yields have climbed sharply, with the 10-year Treasury yield hovering around 4.8% – highest level since 2023. But that is only one part of the story. It seems like In Germany, the 10-year yield recently hit levels unseen since 2011. The UK's 30-year yield hit its highest since 1998. In Japan, the 10-year government bond yield crossed 3% for the first time since 1996.

The turmoil is driven by several factors: First, the US war with Iran is heating up again, driving up US defense spending and the cost of oil, gasoline, diesel and jet fuel. Second, government borrowing. And the third factor impacting bond prices is AI spending. Here's a look at how war, government borrowing and the AI boom are combining to put pressure on global bond markets.

War costs money!

The US-Iran conflict has pushed oil prices higher, with Brent crude recently trading around $95 per barrel and briefly approaching $100. Higher energy costs raise the risk that inflation will remain elevated for longer. Conversely, the higher inflation expectations translate into higher bond yields because investors demand greater returns to compensate for the loss of purchasing power.

Also Read | The bond market is changing fast. Investors need a new playbook.

Now,“the bond market can stop panicking when the Fed starts panicking,” Art Hogan, chief market strategist at B. Riley Wealth Management, told CNN.“If the Fed shows they're willing to start this battle with inflation, perhaps Treasury yields will cool off.”

Governments are borrowing heavily

The US national debt reached $40 trillion last month.

It has spent $931 billion on net interest so far this fiscal year alone, well ahead of the $804 billion spent on national defence, according to the Treasury. Over the next decade, US net interest spending is expected to surpass $16 trillion, according to the Peter G. Peterson Foundation, a fiscal watchdog group.

The UK and Japan are also facing concerns over government finances. Investors are increasingly demanding higher yields to absorb this supply.

An unexpected competitor: AI spending

Companies such as Alphabet, Amazon and Meta are spending huge sums on data centres, chips and other infrastructure needed to build AI businesses, and much of that is being financed through the bond market

Foreign private investors bought about $390 billion in US corporate bonds over the past year, exceeding their $329 billion in Treasury purchases, according to data cited by Business Insider.

The consequences extend well beyond bond traders. Higher government yields can raise mortgage and consumer-loan rates, while more expensive corporate borrowing could eventually make it harder for companies to finance new projects-including the massive AI buildout.

Also Read | Gold and silver prices crash over 1% on MCX amid higher oil prices 'We've maxed out the credit cards.' Why did Bessent's plan flop?

Treasury Secretary Scott Bessent surprised markets with a controversial move to at least double Treasury buybacks, but the intervention massively flopped.

As per JP Morgan, Kelly said Bessent's plan is to move around a bunch of borrowed money.“Unless they can find a way to truly change the trajectory of our debt, the government is powerless to stop this. We've maxed out the credit cards.”

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