Bond Yields Surge to Multi-Decade Highs Amid Fiscal and AI Debt Pressures

The global bond market has seen significant losses, leading to multi-decade high yields in major government bond markets. This trend is attributed to a range of factors, including growing government deficits and ballooning AI debt. In the US, for example, the yield on the 30-year Treasury climbed above 5.31% from below 5.00% at the end of June, its highest level in almost two decades.

Analysts point to the strength of the US economy as a key driver of the rise in yields. 'The economy is chugging along,' says Brad Collins, senior fixed-income client portfolio manager at Vanguard, adding that AI capex spending is keeping growth expectations high.

Fiscal worries are another building pressure point, with growing government deficits threatening to expand borrowing costs for governments and companies alike. In the US, total debt has reached $40 trillion, while in Europe, the Ukraine war is leading some governments to ramp up military spending.

Balloon AI-related debt is adding to concerns about a supply/demand imbalance in both global government bond markets and the investment-grade corporate bond market. 'A lot of people like to focus on the inflation print or lack of inflation, deficits, etc,' says Steve Boothe, portfolio manager and head of global investment grade bonds at T. Rowe Price. 'But you've really had a shift in the composition of demand.'