Global government bond markets are heading toward one of their toughest months in years as rising energy costs fuel inflation and strong investment in artificial intelligence supports economic growth.
The shift is forcing investors to prepare for an environment in which interest rates may remain elevated for longer than previously expected.
US Treasury Yields Surge
Two-year US Treasury yields have risen by nearly 60 basis points in September, putting them on track for their sharpest monthly increase since early 2023.
Borrowing costs for two-year government debt in France, Germany, Britain and Australia are also set for their biggest monthly increases since March, when the Iran war triggered a fresh energy shock. Japanese government bond yields, meanwhile, remain close to multi-decade highs.
“There’s a realisation that the whole energy story and inflation story will not go away in the very short term,” said Kenneth Broux, head of corporate research for FX and rates at Societe Generale.
The rise in yields has made government bonds more attractive to some investors, although concerns about high levels of government debt continue to weigh on demand for longer-dated bonds.
Higher Rates Are Raising Borrowing Costs
Government bond yields have a direct impact on borrowing costs for businesses and consumers, including mortgage rates. A rapid increase can therefore create wider financial and economic pressures.
The benchmark 10-year US Treasury yield has moved above 5% for the first time since 2007 and is on track for its biggest monthly increase since 2022, rising by roughly 50 basis points in September.
The ICE BofA MOVE Index, which tracks volatility in the bond market, has also climbed nearly 30% this month, marking its largest increase since March.
The sharp moves have unsettled some investors, while others see higher yields as an opportunity.
Florian Ielpo, head of macro and multi-asset portfolio management at Lombard Odier Investment Managers, said he had become more positive on government bonds because of the higher yields.
AI Investment Adds to Funding Pressure
Another factor affecting bond markets is the huge amount of borrowing by major technology companies to fund artificial intelligence projects.
Bond sales by hyperscalers have more than doubled this year to over $200 billion, according to LSEG data. That additional supply is competing with government borrowing and could help keep funding costs elevated.
Despite the higher rates, some dealmakers say financing remains manageable.
“5% is not so high by historical standards,” Warburg Pincus CEO Jeffrey Perlman said at a conference in Singapore. “Deals can work at a 5% 10-year.”
Europe Faces Fiscal Pressure
European bond markets are also dealing with country-specific political and budget concerns.
France’s 10-year bond yield has risen by more than 50 basis points this month, its largest monthly increase since 2022. The spread between French and German 10-year yields has also widened to its highest level since 2012.
Investors are closely watching France’s budget negotiations, while political tensions are adding to uncertainty around the country’s finances.
Britain is also preparing for its first budget under new Finance Minister John Healey, keeping fiscal policy in focus across major European economies.
More Market Tests Ahead
October is expected to bring several important tests for bond markets, including the latest US employment and inflation figures, French budget negotiations and the UK budget.
In the United States, investors are also watching the outlook for monetary policy and government borrowing.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, said uncertainty was coming from both the Federal Reserve and the US Treasury, adding that he was “deeply uncomfortable about the US policy mix.”
For investors, the combination of persistent inflation pressures, strong economic growth, heavy government borrowing and increased corporate debt issuance is reshaping expectations around interest rates.
The result is a bond market adjusting to the possibility that the era of exceptionally low borrowing costs may remain firmly in the past.
