Major government bond markets are experiencing a new wave of selling, which has pushed borrowing costs in the United States, Germany and Japan to high levels not seen in decades, with renewed concerns about inflation, interest rates, and government debt burdens.
The yield on 10-year US Treasury bonds jumped to 5.34 percent on Thursday, its highest level since 2002, after recording during the third quarter its largest quarterly rise since the beginning of this century, with an increase of nearly 90 basis points.
French 10-year bond yields rose to their highest levels since 2002, while British 30-year bond yields exceeded 6 percent for the first time since 1998, while Japanese bond yields also reached high levels compared to previous decades.
These moves come at a time when a renewed rise in oil prices due to tensions between the United States and Iran has increased inflation fears, prompting investors to prepare for the possibility that interest rates will remain high for a longer period, or even increase them again.
Why are bond yields rising?
Bond yields move opposite to their prices, so the sell-off raises the cost of borrowing for governments, companies, and individuals. The rise in long-term yields also reflects investors' concern about continued inflation and the increasing needs of governments to borrow and spend.
US government debt has exceeded $40 trillion, while the debt-to-GDP ratio is 100 percent or more in most G7 economies, with the exception of Germany.
These developments gain broader importance, because government bond yields are a main reference for borrowing costs in the economy, from mortgages, car loans, and education, to corporate financing. The higher interest rates, the less attractive borrowing and spending become, which could put pressure on economic growth.
In the United States, the most common mortgage rate rose last month to its highest level in more than two years, exceeding 7 percent for the first time since the first week of Trump’s current term.
Higher yields also increase the cost of servicing government debt when refinancing maturing bonds. In Britain, the interest bill amounted to about 4 percent of output, nearly double its average during the decade before the pandemic, according to the British Public Finance Oversight Office.
Artificial intelligence increases demand for borrowing
The pressures are not limited to governments. Huge spending on artificial intelligence has become an additional factor in increasing corporate debt issuance, and thus increasing the supply of bonds in the markets.
Data from the London Stock Exchange Group show that five of the largest artificial intelligence companies, namely Alphabet, Amazon, Meta, Microsoft, and Oracle, have issued bonds worth $220 billion since the beginning of the year to finance their investments in data centers and models for artificial intelligence, which is more than double their total issuances during the past year.
Issuances are expected to continue to rise in the coming months as technology companies expand spending on the infrastructure needed for artificial intelligence.
The rule of supply and demand in the bond market means that a greater need to borrow allows lenders to demand higher returns, which pushes financing costs higher.
Can governments and central banks intervene?
Some governments and central banks are seeking to limit pressures, but measures taken so far have not stopped the rise in long-term yields.
The US Treasury Department recently announced a bond buyback program, in a move that analysts believe aims to reduce borrowing pressures, but long-term bond yields continued to rise after the announcement.
Central banks can also buy bonds when markets are under severe pressure. The Bank of England used this tool during the British mini-budget crisis in 2022.
The European Central Bank also has a tool to protect the transmission of monetary policy that allows it to buy government bonds to limit the “unjustified and unregulated” rise in borrowing costs, provided that the country in question adheres to European budget rules.
But Bank of France Governor Emmanuel Moulin warned last week that expecting the European Central Bank to intervene to rescue the French bond market would be misleading.
Are the Bond Guardians back?
Many investors see the current rise in yields as reflecting a combination of increased borrowing and fears of inflation.
The decline in oil prices may provide some relief in the short term, but investors believe that a sustainable decline in long-term borrowing costs ultimately requires coordinated government action to reduce debt burdens or boost economic growth.
In the absence of such measures, markets remain vulnerable to pressure from what is known as “bond vigilantes,” which are investors who demand higher returns when they see that governments are pursuing expansionary fiscal policies or are not doing enough to reduce inflation.
The return of these concerns reflects a shift in investors’ outlook on the bond market, as pressures are no longer linked only to the path of short-term interest rates, but also to the ability of major economies to manage debt levels and finance their investment needs in an environment characterized by high demand for capital.
The administration of US President Donald Trump has pressured Germany and France to withdraw part of their emergency diesel stocks to help increase global supply and reduce fuel prices, hinting at the possibility of imposing a US ban on diesel exports if the two countries do not respond, according to three sources familiar with the discussions.
The US administration asked the European Union, according to a European source, to release about 120 million barrels of diesel during the next six months, in a move that reflects mounting pressure on Europe to contribute to alleviating the scarcity of refined petroleum products in global markets.
The European Commission, France, Italy, Ireland and Britain, along with Germany, are holding discussions on Thursday regarding the potential need to release diesel stocks, according to an EU official.
An American official said that it is in Europe's interest to "work with the United States" on multiple paths to increase supplies of refined products and reduce their costs for consumers.
The American pressure comes at a time when the Trump administration is considering banning American diesel exports with the aim of increasing supply in the local market and reducing fuel prices, with the midterm elections approaching in November.
US Energy Secretary Chris Wright said on Wednesday that the administration expects European announcements to be issued soon regarding additional supplies of diesel, noting that the markets have lost part of diesel exports coming from the Middle East and China.
Wright added that some diesel exports from the Middle East are starting to return, but the recent unrest has led to the loss of large amounts of supplies.
Pressure on France and Germany
The US administration is particularly concerned about France and Germany, as Washington believes that the two countries have not fully implemented previous pledges to release emergency stocks of oil and petroleum products, as Reuters reported earlier.
An official at the Elysee Palace said that French President Emmanuel Macron did not discuss the issue with Trump during their meeting on the sidelines of the United Nations General Assembly meetings in New York last week.
But the official explained that Macron will hold a video conference with the leaders of the G7 countries to discuss the rise in fuel prices and the availability of refined products globally, including coordinating the release of reserves in cooperation with the International Energy Agency.
Europe depends more on American fuel
Europe's dependence on American fuel increased after it banned imports of Russian oil and products in the wake of the Russian war on Ukraine, at a time when the American-Israeli war on Iran led to the disruption of supplies from the Middle East.
The American move comes at a time when refined products markets are facing increasing pressure as a result of supply disruptions and a decline in some flows from key regions, which has prompted Washington to search for additional sources of supply outside the American market.
The Turkish authorities accelerated their steps to deal with the investment funds crisis that erupted in mid-September, causing major losses to the main index of the Istanbul Stock Exchange and the flight of huge investments from the markets.
The Capital Markets Authority decided to disburse temporary amounts to investors in 131 investment funds owned by 7 companies that had previously issued an order to liquidate them within a time period of up to 6 months.
The Authority stated, in a statement issued early Thursday, that investors in the “Terra Portfoy”, “Busola Portfoy”, “Atlas Portfoy” funds, and “Hadaf Portfoy” Asset Management funds will receive the full amounts of their investments if they are less than one million Turkish liras (about 20 thousand and 405 dollars). As for investors whose net investments amount to one million liras or more, they will receive one million liras as a temporary payment.
Restitution of illegal profits
For its part, the Banking Regulatory and Supervision Authority announced that the Savings Deposit Insurance Fund will assume the shareholders’ rights in 3 investment banks and two commercial finance companies involved in the fund crisis, which are banks: “Tera Yatirim”, “Destek Yatirim”, “Hadif Yatirim”, and the companies “Destek Finance Factoring” and “Tera Finance”. Factoring».
The decision included the transfer of ownership shares in the two companies within 6 months, with the Savings Deposit Insurance Fund exercising the voting rights associated with those shares until the transfers are completed.
He pointed out that the assets of the three banks represent only 0.22 percent of the total assets of the banking sector, while the assets of the two companies constitute 1.45 percent of the assets of the factoring sector.
Government movements
In a move to encourage those who received profits exceeding the real profits of shares and shares to return the money they obtained illegally, the Capital Markets Authority announced the opening of accounts in the name of the Savings Deposit Insurance Fund, to recover the excess profits obtained from the sale of participation shares in investment funds under liquidation, as well as those who made excess profits from the shares of publicly traded companies, optionally.
In accordance with the Capital Markets Law and related legislation, “optional redemption accounts” have been opened for investment funds under liquidation, separately for each fund in the unified fund account in the name of the Savings Deposit Insurance Fund in the “Agricultural Bank” and “Ace Bank”, where the optionally deposited funds will be used to pay the dues of the share holders.
A “General Share Redemption Account” was also opened at Berlişek von Bank in the name of the Savings Deposit Insurance Fund for those wishing to return the huge profits they made from buying and selling shares of public joint-stock companies and similar transactions.
Turkish Vice President, Cevdet Yilmaz, announced through his account in “X” that the “Funds Coordination Council,” the establishment of which President Recep Tayyip Erdogan announced on Tuesday, will hold its second meeting on Friday morning, pointing out that the road map to resolve the crisis has been determined, and that all relevant institutions are taking concrete steps in coordination with each other regarding issues that fall within the scope of their responsibilities, and judicial procedures are being implemented effectively.
He added that the Government Audit Bureau has begun its work, and each stage of the process will be managed within the framework of legal rules, in line with the legitimate sensitivities of citizens, and with sound logic, and that their basic approach is to protect the rights of the public and investors, and to take the most effective measures against manipulators and speculators who achieve illicit profits through illegal transactions.
New arrests
Regarding the ongoing investigations into incidents of manipulation and fraud in investment funds, the Istanbul Public Prosecution decided to arrest 5 officials and executives, including the two executives at Terra, Emir Munir Saripinar and Erden Ozel, who were previously detained as part of the ongoing investigations by the Anti-Terrorism Financing and Money Laundering Department of the Istanbul Public Prosecutor’s Office.
12 officials from the 7 companies that managed the tampered funds were previously arrested, while investigations are still ongoing with 20 others.
Justice Minister Akin Gorlik said in statements on Thursday that all assets confiscated as part of the investigations will be directed to providing the necessary resources for the system established for the benefit of the victims and will be deposited in the accounts designated to repay their dues.
He added that priority will be given to owners of shares and shares of less than one million Turkish liras, with the aim of addressing complaints from small investors quickly, in the first stage.
The scandal of manipulation and fraud in investment funds erupted in mid-September, after some funds were unable to meet investors’ requests to recover their money, which led to a wave of turmoil in the Turkish stock market.
The Turkish Capital Markets Authority ordered the liquidation of 131 funds managed by 7 companies, with the value of their assets amounting to about 18 billion dollars, causing damage to 455,758 investors who were affected by the decision.
The main index of Istanbul Stock Exchange (BEST 100) recorded its worst monthly performance since 2008 last September, due to a selling wave that began simultaneously with the fund crisis that was unable to meet investors’ demands due to the scarcity of liquidity.
The index ended the month of September trading down by 16.65 percent, and the index closed the last day of the month, Wednesday, with a decline of 2.79 percent, falling by 20 percent below the record closing level recorded on May 11, confirming its entry into a bear market.
The index fell by about 35 percent in September, recording its worst monthly performance in lira terms since its launch in 2009.
