US bond yields hit highest level since 2002 as global debt sell-off deepens

Why are global bond yields surging?

Government borrowing costs in the US and Europe have leaped to multi-decade highs, led by the US 10-year Treasury yield hitting 5.34% on Thursday. That mark represents its highest level since 2002, capping off a volatile period that saw the yield jump nearly 90 basis points over the third quarter.

Several factors are feeding this global bond rout. Rising oil prices, driven by escalating tensions between the US and Iran, have revived fears that inflation will remain stubborn and force central banks to keep interest rates elevated for longer.

At the same time, governments are flooding the market with new debt. The total US debt has now crossed the $40 trillion mark, while national debt as a share of economic output is hovering at or above 100% across nearly all G7 economies. According to the Institute of International Finance, major nations are now spending more on interest payments than the entire world invests in defence, clean energy, or artificial intelligence.

How artificial intelligence is driving up yields

An unexpected catalyst behind the rising yields is the sheer volume of corporate debt being issued to build out artificial intelligence infrastructure.

Five of the largest tech companies—Alphabet, Amazon, Meta, Microsoft, and Oracle—have collectively issued $220 billion in debt so far this year to build data centres and develop AI models. Data from LSEG shows this is more than double the total debt they issued last year.

This flood of new corporate bonds has altered the supply-and-demand balance of the credit markets. With so much new debt up for grabs, lenders can demand higher interest rates, which in turn pushes up yields across the board.

The pressure on markets and households

While cash-rich tech giants can absorb these higher rates, the rest of the economy is feeling the strain.

Rising yields are starting to pressure equities outside the insulated AI trade. Higher government bond yields offer investors a safer, guaranteed return, making riskier stocks look far less attractive by comparison.

Consumers are also feeling the squeeze. The interest rate on the most popular US home loan recently jumped past 7% for the first time in over two years, driving up mortgage costs for households.

In Europe, the pain is mirrored in rising sovereign borrowing costs. French 10-year yields have climbed to heights not seen since 2002, while British 30-year borrowing costs touched 6% for the first time since 1998.

What happens next?

US Treasury Secretary Scott Bessent has downplayed the panic, suggesting that concerns over debt and yields overlook the underlying strength of the US economy. The US Treasury has also launched bond buyback programmes to help stabilise borrowing costs, though long-term yields have continued to rise regardless.

Central banks have the power to step in and buy bonds during periods of extreme market stress. However, Bank of France Governor Emmanuel Moulin recently warned that it would be misguided for investors to assume the European Central Bank will automatically step in to rescue French debt from a market-driven sell-off. Investors say longer-term borrowing costs will only fall durably if governments take concrete steps to curb spending or boost growth.