Why Are Bond Yields Surging Around the World?

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Global government bond yields are at their highest level since 2008 because investors are selling them, pushing prices down. A Bloomberg gauge tracking global sovereign debt climbed to 3.72% earlier this week.

What’s causing the global sell-off? According to Matthew Burgess and Alice Atkins from Bloomberg:

• Rising oil prices amid renewed conflict in the Middle East are fueling inflation concerns, while investors are increasingly betting on interest-rate hikes from major central banks.
• Elevated government spending in the US, UK, and Japan is prompting investors to demand higher returns to hold longer-term government debt.
• Record corporate borrowing, including borrowing by US tech companies to fund AI investment, could also be competing with government bonds for investors’ money.
• The move came after Fed Chairman Kevin Warsh’s Jackson Hole speech last Friday, where he doubled down on his vow to tame inflation that has run above target for five straight years. (Our sister publication, DailyDAC, addressed this last week– check it out.)

Our take? For most of the past 15 years, the boring option paid nothing. A government bond was the financial equivalent of a savings account earning 0.2%– technically money, spiritually a coat closet. That made every risky bet look reasonable by comparison, because the alternative was nothing.

The boring option now pays.

When safe government debt yields this much, everything speculative has to clear a much higher bar to justify itself. And nothing is being asked to clear a higher bar than AI stocks priced for a decade of flawless growth. (Bloomberg has more to say on that here.) Which brings us to the part worth sitting with: the AI boom is helping cause the very thing that threatens it.

Tech companies are borrowing enormous sums to build data centers, and that borrowing competes with governments for the same finite pool of lenders’ money. More competition for money means a higher price for money. The price of money is the interest rate. So the borrowers are bidding up their own cost of borrowing while betting that the borrowing will pay off. But the AI borrowing loop has a brake: if money gets expensive enough, data centers stop being built. Washington has no such brake. Higher rates mean a bigger interest bill, which means a bigger deficit, which means more borrowing, which means higher rates. That one doesn’t self-correct. It just gets larger while you’re not looking.

Taking a step back, though, the crowding-out effect from tech issuance is just one factor among several, and a modest one against a global sovereign market measured in tens of trillions. Deficits, sticky inflation, and the Fed are doing more of the work.