Government borrowing costs in developed countries are at decades-high

Government borrowing costs of developed countries, especially the USA, France, Germany and Japan, have reached their highest level in decades due to concerns about high inflation, interest rate increases and debt burden.

It is stated that rising bond interest rates may also worsen public finances by putting pressure on households and companies.

"Overheating" in the US economy and Fed expectations

The second quarter GDP data announced by the US Department of Commerce, which exceeded expectations, and the August personal income and consumption expenditure data, which showed that inflation remained well above the Fed's target, fueled the fire in the markets. These two data, proving that the US economy and consumption appetite are still very hot, caused a sharp selling wave in global stock markets by rapidly increasing the US 10-year bond interest rate with the concern that the Fed will continue its tight monetary policy.

The 10-year US bond interest rate, which is considered the main indicator for global borrowing costs, reached its highest level since 2002 at 5.34 percent.

US bond yields increased by nearly 90 basis points in the third quarter of the year, recording the largest quarterly increase this century.

While investors are accelerating the disposal of bonds with the expectation that the Fed will continue to increase the policy rate at the end of this month, economists point out that the economy is showing signs of "overheating". All eyes in the markets are on the September employment report, which will be announced today and where unemployment is expected to remain constant at 4.1 percent.

Interest expenses outpace investments

While bond interest forms the basis of all borrowing costs, from housing loans to vehicle loans, the interest rate of the most common 30-year mortgage loan in the USA has exceeded the 7 percent limit for the first time since the beginning of 2025.

According to data from the Institute of International Finance (IIF), interest expenses of major economies have outpaced global investments in artificial intelligence, defense or clean energy.

The background of the fragility in the bond market includes economic vitality as well as chronic debt concerns. The tension between the USA and Iran triggers inflation by causing new increases in oil prices, feeding interest rates upwards.

On the other hand, while the total debt burden of the USA exceeds 40 trillion dollars, the ratio of debt stock to national income in all G7 economies except Germany is 100 percent and above, increasing the uneasiness in the markets.

Artificial intelligence investments and the global wave

The explosion in artificial intelligence investments also plays a structural role in this rise. The world's five largest technology companies operating in the field of artificial intelligence issued bonds worth $220 billion this year to fund data centers. This increase in the need for borrowing pushes interest rates even higher.

This earthquake is global in nature. Britain's 30-year government bond interest rate exceeded 6 percent yesterday and rose above this level for the first time since 1998. While France's 10-year bond interest rates reached the highest level since 2002, Japan also reached its highest level in decades.

"Bond guardians" are on alert

US Treasury Secretary Scott Bessent argues that concerns should not overshadow the overall strength of the US economy. Even though the US Treasury announced that it would buy back bonds in order to limit costs, interest rates continued to rise.

Experts point to "bond guards", investors who demand higher interest rates to force fiscal discipline on governments whose spending they see as excessive.

Stating that the possible decline in oil prices may provide relief in the short term, analysts emphasize that long-term borrowing costs can only decrease permanently if governments take decisive steps to reduce debt.

Foreign exchange markets are under pressure

The squeeze in global bond markets triggers risks in the Eurozone and puts foreign exchange markets under pressure.

Tim Waterer, global chief market analyst at Australia-based KCM Trade, stated that high oil prices, public debt burden and capital competition from the artificial intelligence sector are behind the sharp rise in bond interest rates.

Waterer emphasized that the tightness in the market will continue unless there is a significant decrease in oil prices or an agreement is reached between the USA and Iran.

This macroeconomic pressure also increases fragility on the European side.

In his analysis, ING FX Strategist Francesco Pesole pointed out that the France-Germany 10-year bond interest rate reached 130 basis points following France's budget announcements. Pointing out that the current budget plan is insufficient to solve structural deficits, Pesole predicted that this gap could widen up to 150 basis points.

Stating that this volatility in the bond market creates depreciation pressure on the euro, Pesole said, "Although the euro/dollar parity has remained resistant so far, the widening in the yield spread poses serious downside risks. With the increase in the perception of financial risk, the euro will become more sensitive to these developments. If the spreads continue to widen, it is entirely possible that the parity will decline to 1,110 levels." made his assessment.