Bond Market Wildfire Fuels Global Economic Uncertainty

The global bond market is experiencing a 'wildfire' that's keeping world leaders up at night. The immediate reason for this increase in interest rates is the ongoing closure of the Strait of Hormuz and renewed hostilities between the US and Iran, which has pushed up inflation and raised expectations of higher interest rates in major economies.

Markets had assumed tensions would subside ahead of the US midterm elections in November, but that hasn't happened. As a result, markets are pricing in higher energy prices, a chronic Gulf crisis, higher inflation for longer, and so higher interest rates.

The bigger picture is rising demand for borrowing across the world, not just from governments. Big tech companies like Google, Amazon, and Meta are turning to bond markets to raise hundreds of billions of dollars for investments in AI data centers.

These tech giants have already issued over $219bn (£162bn) of debt this year, nearly a third of it in currencies other than the dollar, including sterling. Some expect them to raise $400-$500bn from bond markets this year, which is staggering and pushing up competition in the market.

Looking east, Japan has the highest debt burden relative to its GDP among major economies and is the biggest single lender to the US government. Its central bank's interest rate was zero until recently, but it has crept up to help combat rising inflation. As a result, its government bond yields have been pushed to 30-year highs.

The credibility of borrowing plans set out by major countries is the biggest factor pushing up rates. The market equation is that if a country wants to borrow more without a credible plan, especially with doubts over government stability, it should expect to pay a higher rate.