The global bond sell-off has intensified, with benchmark 10-year government bond yields across major economies climbing to multi-decade highs as elevated fiscal deficits, changing investor demand and the massive borrowing requirements of the artificial intelligence buildout add pressure to already stretched debt markets.
The sell-off, which began after the US-Iran war pushed oil prices higher and reignited inflation concerns, has now spread across major developed markets. In late September and early October, the US 10-year yield climbed to around 5.3%, its highest level since 2002.
The rise has spilled over into other markets. Germany's 10-year yield rose to 3.6%, its highest since 2009, while France's climbed to 4.9%, the highest since 2002. The UK 10-year yield reached 5.4%, its highest since 2007, while Japan's rose to 3.1%, a level not seen since 1996.
Thirty-year yields have also surged, with US yields at around 5.6%, UK yields at 5.9%, Germany at 3.9%, France at 5.4% and Japan at 4.2%.
Rising Debt And Deficits Are The Biggest Structural Driver
The sharp increase in government borrowing is emerging as the biggest structural challenge for bond markets. Global fiscal deficits are estimated at around 5.2% of GDP in 2026, roughly 170 basis points above pre-pandemic levels. Global public debt is also about 13 percentage points of GDP higher than before the pandemic and is expected to exceed global GDP by 2030.
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Higher debt stocks become increasingly expensive to service as bond yields rise, creating a feedback loop that can require governments to borrow even more. Ageing populations in developed economies add another layer of pressure by shrinking the tax base while increasing healthcare spending and pension liabilities.
Bond Investor Base Has Changed
The demand side of the bond market has also undergone a structural shift. Central banks have moved away from the large-scale bond purchases associated with quantitative easing, while demand from foreign official institutions has weakened. This has increased the relative share of price-sensitive investors, including hedge funds, in sovereign bond markets.
With a greater proportion of investors sensitive to yields and prices, the market can react more sharply to changes in supply, inflation expectations and fiscal risk.
AI Borrowing Could Trigger ‘Reverse Crowding Out'
The global AI infrastructure boom is creating another major source of demand for long-duration capital. Hyperscalers have already raised around $220 billion through bonds in 2026, while the broader AI ecosystem could borrow around $500 billion through bond markets in 2027.
That figure is significant when compared with roughly $430 billion of US Treasury supply in the 20-30-year maturity segment. The competition for duration capital could result in what analysts describe as “reverse crowding out”, where private-sector AI investment effectively crowds out government borrowing from the available pool of long-term capital.
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This could put further upward pressure on risk-free yields, particularly as AI companies ramp up spending on data centres, power infrastructure and computing capacity.
Geopolitical Risks Add To Yield Pressure
The structural pressures are being compounded by geopolitical uncertainty. The US-Iran war pushed oil prices higher, raising concerns about a renewed inflation shock. Persistent geopolitical risks could keep energy prices elevated, forcing central banks to maintain a hawkish stance for longer.
Markets are now factoring in the possibility of further monetary tightening by the Federal Reserve, European Central Bank, Bank of England and Bank of Japan. Expectations of higher policy rates typically feed through to higher government bond yields.
Country-specific factors are adding to the pressure. Higher fiscal spending in Japan and Germany, changes in US policy communication, political fragmentation in France and limited fiscal flexibility in the UK are contributing to divergent but broadly upward pressure on long-term yields.
Can The Bond Rout Ease In 2027?
The bond sell-off could continue in the near term as governments face high borrowing requirements and AI companies increase their demand for debt financing. The US Treasury has already taken measures to ease pressure on the long end, including increasing its buybacks of longer-dated securities from $2 billion initially to $4 billion in August and $6 billion in September. It has also increased its reliance on Treasury bills to reduce issuance pressure on longer maturities.
However, the impact of these measures has so far been limited.
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