Government borrowing costs surge as geopolitical tensions and fiscal concerns mount

Government borrowing costs in several advanced economies continued to rise to levels not seen in decades on Tuesday, as hopes of an end to the US-Iran war faded.

Concerns about the inflation outlook worsened after the ceasefire between Washington DC and Tehran ended on Monday night without an agreement, with no progress on the reopening of the strait of Hormuz.

Donald Trump’s threat to bomb Oman if they “get in the way” of negotiations helped to push oil higher on Tuesday, to above $91 a barrel, and investors fear higher energy prices will push inflation up, leading to higher interest rates.

Fiscal pressures are also rising as governments ramp up defence spending, which is expected to drive borrowing higher in leading European countries such as Germany and the UK.

The yield, or interest rate, on the 30-year US Treasury bond rose to 5.324% on Tuesday, the highest since June 2007, adding to gains on Monday.

The yield on the 10-year US Treasury bond rose to 4.736%, while the equivalent Japanese government bond yield climbed 2.5 basis points to 2.945%, the highest in three decades.

The yield on the UK’s 10-year gilts rose 2.6bps to 5.076%. Germany’s 10-year bond yield rose to the highest level since 2011 while France’s equivalent hit a 16-year peak. Bond yields rise when the price of the debt falls.

“Rising long-dated bond yields are not driven solely by expectations of higher interest rates and inflation fears. They can also reflect concerns around high levels of government borrowing and investors demanding greater compensation for the risks of holding long-dated government bonds,” Dan Coatsworth, the head of markets at AJ Bell, said.

Concerns about the amount of new debt hitting the bond markets, issued by governments and companies such as AI firms, is another factor pushing up yields.

“We are seeing bond yields across developed markets strike multi-year highs as fixed income investors grow nervous about a range of factors, from inflation and the Iran conflict to deeper structural concerns and fiscal worries. Issuance is clearly a factor – both on the government side (they can’t stop spending!) and on the corporate side (AI capex),” said Neil Wilson, a Saxo UK investor strategist.