The explosive cocktail driving up borrowing costs worldwide
The deepening global bond sell-off has sparked intense debate about the factors driving investors to sell bonds, as well as the levels to which yields will rise.
The yield on the U.S. 10-year Treasury note—which serves as a benchmark for borrowing costs globally as well as for asset prices—soared to 5.34% the highest level since 2002. Its yield in the third quarter of 2026 recorded the largest quarterly increase of the current century.
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More than half of the 173 participants in a Markets Pulse survey last week predicted that the yield on 30-year U.S. Treasury bonds would reach 6% by the end of the year.
In Europe, the United Kingdom’s long-term borrowing costs reached 6% for the first time in nearly three decades, making the country the first G7 economy to record such a high interest rate since the euro crisis in 2012. The yield on 30-year bonds rose by six basis points, reaching 6.01%.
Borrowing costs, from Japan to France, are also hitting new record highs, contributing to the rise in the Bloomberg Global Aggregate Treasuries Total Return Index to its highest level since 2000.
Global fixed-income securities have lost 2.7% this year, while stocks have risen 13%.
The wave of massive sell-offs is unfolding amid persistent inflation, fiscal concerns, and resilient economic growth. These factors add to a growing list of pressures on bonds, prompting investors to wonder what forces are actually driving yields higher. In this context, Torsten Slok of Apollo Global Management Inc. is among those who believe that interest rates may remain “higher for longer.”
Bloomberg has compiled ten reasons why investors are selling bonds.
1. Resilient economic growth
Investors typically turn to bonds when the outlook is bleak. Right now, the U.S. economy continues to grow at a solid pace, and global growth remains resilient, despite the war in Iran and higher borrowing costs.
Global business activity is strong, with manufacturing indices pointing to the fastest growth in recent years across major economies.
This resilience is fueling inflation and the risk of further interest rate hikes, while also giving investors reasons to favor stocks over bonds.
Inflation is detrimental to bonds, as it reduces the real value of the interest and principal payments that investors will receive in the future.
2. Higher commodity prices
The U.S.-Iran conflict triggered what Goldman Sachs Group Inc. described as the largest oil supply shock ever recorded.
Brent crude oil prices surged to $126.41 per barrel as the conflict restricted the flow of energy through the critical Strait of Hormuz, driving up gasoline and diesel prices and helping to keep broader inflationary pressures at high levels.
At the same time, food prices are also rising sharply, partly due to recent heat waves.
3. Interest Rate Hikes
The Fed raised interest rates in September for the first time since 2023, and policymakers are signaling that further increases may be necessary, as inflation has been above the central bank’s target for more than five years now.
Central banks in Australia, Japan, and the eurozone have also raised interest rates to curb inflation, with traders now pricing in rate hikes across the United Kingdom, Canada, and Europe in the coming months.
A recently published study found that approximately 90% of the rise in 10-year bond nominal yields since August 2020 occurred around the release of nonfarm payroll reports and speeches by key Fed officials, suggesting that the market’s view of short-term interest rates is the dominant driver of yields.
And as borrowing costs rise, homeowners are refinancing less, extending the duration of mortgage-backed securities and forcing some investors to sell government bonds to offset the resulting increase in interest rate risk.
4. Lending and Infrastructure Development by Hyperscalers
The race to develop artificial intelligence infrastructure has triggered a borrowing frenzy, which is swelling the volume of debt flooding the markets. This year alone, companies have issued more than $400 billion in bonds worldwide to finance technology investments, with most of this activity taking place in the U.S.
This is forcing all types of borrowers—including governments and companies financing mergers and acquisitions—to compete more intensely to attract capital from investors.
5. Fiscal Deficits and Debt
Fiscal risks are escalating amid persistent budget deficits and governments’ reluctance to address them effectively. U.S. debt recently surpassed the $40 trillion mark for the first time, driven by tax cuts as well as the fallout from the 2008 financial crisis, the COVID-19 pandemic, and recent energy and geopolitical upheavals.
Across the OECD, debt interest costs exceeded $2 trillion, or 3% of GDP, last year and are expected to rise further. In France, interest costs are expected to rise by a quarter this year, while in a number of countries they already exceed defense spending.
The OECD’s chief economist, Stefano Scarpetta, explains that government bond yields are rising partly because of concerns about the sustainability of public finances, with the OECD warning of “increasingly pressing fiscal challenges” affecting many of its members.
OECD countries are expected to borrow a total of $18 trillion this year, which increases supply in the markets and prompts investors to demand higher yields to purchase the debt.
“The seemingly unstoppable rise in long-term bond yields in developed markets is yet another factor pushing several of these economies onto unsustainable debt trajectories,” notes Katharine Neiss, deputy head of global economic analysis at PGIM Credit.
In the U.S., Steven Blitz, managing director of strategy and global macroeconomic analysis at TS Lombard, pointed out that the lack of “political will to cushion a recession means that the current rise in yields won’t stop at 6%,” with the rate potentially reaching 8% in the coming years.
6. Defense Spending
Global military spending is at record levels, driven by the war involving Iran, the ongoing conflict in Ukraine, and broader rearmament trends in NATO, the Middle East, and Asia.
The U.S. defense budget reached $1 trillion for fiscal year 2026, surpassing that threshold for the first time.
The increase in military spending is inflating governments’ financing needs, boosting bond sales and putting upward pressure on yields.
7. The Impact of Japan
Japan is facing the problem of a weakening yen in international currency markets, and authorities are likely selling foreign bonds in an effort to counter thesituation.
Data from the Ministry of Finance on foreign exchange reserves showed that Tokyo’s holdings of foreign securities fell by aa record $87.8 billion at the end of August compared to the previous month, as Japan likely sold U.S. Treasury bonds (Treasuries) to prop up the yen.
Any further intervention would put even greater pressure on global bond markets, although the desire to protect U.S. Treasuries is considered one of the reasons why the U.S. has assisted Tokyo in supporting the yen.
At the same time, Ed Yardeni, president and chief investment strategist at Yardeni Research, points out that the liquidation of positions as part of the “carry trade” strategy (which is financed by borrowing in yen) is also contributing to the wave of bond sales.
The rise in interest rates in Japan “is now forcing investors who follow the carry trade strategy to sell government bonds, which they had purchased globally using funds from low-cost yen-denominated loans”, he wrote.
8. Trade Wars
Trump’s ongoing trade war adds yet another risk factor for inflation, as higher tariffs make imported goods more expensive and threaten to keep price pressures high.
This, in turn, reinforces expectations that interest rates will remain high for a longer period and exerts further upward pressure on bond yields.
Trade disputes are a symptom of deeper geopolitical fragmentation and an increasingly unstable global outlook — an environment in which investors demand higher yields to compensate for greater uncertainty.
9. A Shift in the Composition of Creditors
In the case of U.S. Treasury bonds, the buyer base has gradually shifted from the Fed and foreign central banks toward domestic and foreign private investors, such as hedge funds (hedge funds).
Bloomberg Economics estimates that the portfolios of U.S. Treasury bonds held by the Fed and foreign official entities, as a percentage of U.S. GDP, have declined by approximately 12 and 8 percentage points, respectively, since 2020.
Researchers at the New York Fed stated last month that the market has become “increasingly price-sensitive over time” and that this explains a “significant portion of historical changes in returns.”
10. Elimination of the savings surplus
Finally, the global savings surplus, which helped keep borrowing costs low for decades, has been eliminated.
According to Oxford Economics, the three factors that led to persistent global savings surpluses following the global financial crisis—fiscal austerity, deleveraging in the U.S., and Chinese exports—are either subsiding or being curtailed due to protectionism.
Source: in.gr
