Government Bond Market Shaken Again... US, Japan, Europe Interest Rates 'Soaring'

▲ Government bonds, interest rates/AI generated image

As global bond yields soar to multi-decade highs, the interest burden on governments, corporations, and households is simultaneously increasing.

According to CNBC on September 4 (local time), Germany's 10-year government bond yield rose to its highest level since 2011. Japan's 10-year government bond yield exceeded 3%, and the US 10-year government bond yield recorded its highest level since November 2023. UK government bond yields also rose to their highest level since the 2008 financial crisis.

Behind the bond sell-off are concerns about inflation due to large-scale government debt issuance and rising oil prices. Expectations that central banks may maintain tight monetary policy longer than anticipated have also pushed up interest rates. Robin Brooks, a senior fellow at the Brookings Institution, called it "an extension of a multi-year medium-term trend." Natalia Lojevsky, Managing Director at CIFC Asset Management, also suggested the possibility of further rate hikes due to increased government bond supply and inflation risks.

The first to face increased burdens are countries with large fiscal deficits and high debt. Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, identified France as a vulnerable country among developed nations. Japan's government debt exceeds 200% of its Gross Domestic Product (GDP). In fiscal year 2026, national debt-related costs are estimated to account for more than 25% of government spending.

Corporations also cannot avoid rising funding costs. Companies with high debt or a large proportion of floating-rate borrowings may face greater pressure. Commercial real estate, private equity-owned companies, direct lending markets, and low-credit software companies were identified as key vulnerable sectors. The investment competition in artificial intelligence (AI) is also increasing bond supply. Larry Holzenthaler, Senior Portfolio Manager at Catalyst Funds, stated, "Massive amounts of debt are being issued to finance various AI projects."

For households, financial costs sensitive to long-term interest rates, such as mortgage loans and auto loans, may rise. It was analyzed that low-income households, where loan repayments and essential spending account for a large portion of their income, would bear a relatively greater burden. The stock market could also come under pressure if high bond yields persist. Deutsche Bank estimated that the US 10-year government bond yield would need to rise to approximately 5.5% over the next year for losses from price declines to outweigh coupon income. For a two-year period, it calculated that the nominal total return would turn negative only if it rose to approximately 6.4%.

[Article Key Summary]

-Global long-term government bond yields are rising to multi-decade highs, increasing funding costs for governments, corporations, and households.

-Large-scale government bond issuance, inflation concerns due to rising oil prices, and expectations of prolonged tightening are stimulating the bond sell-off.

-Deutsche Bank presented the risk that the US 10-year government bond yield could rise to approximately 5.5% over the next year.

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