Over the past month, interest rates across G7 nations have risen steadily, in some cases reaching multi-decade highs.
This surge in yields primarily reflects mounting inflationary risks, as the Strait of Hormuz remains blocked and crude oil prices remain above $100 per barrel.
Such a backdrop is expected to compel central banks to tighten policy further. Investors are currently pricing in 25bp hikes from the Bank of Japan, the ECB, and the Bank of England in June. For the Fed, the prospect of a rate hike in 2026 also appears to be becoming increasingly likely by the day.
In particular, the rise in long-term rates is also driven by high fiscal deficits. Furthermore, the ongoing energy crisis is intensifying the pressure on public finances.
According to Reuters, the Japanese government is preparing a new debt issue to fund a support package aimed at mitigating the impact of the energy crisis. Following this news, the 10-year yield rose to 2.8%, its highest level since October 1996, while the 30-year yield reached a new record of 4.2%.
The bill is just as steep for Europe, which is heavily exposed to the energy crisis. The Bund, for instance, is at its highest level since 2011. However, Gilts remain central to the storm, with the 30-year yield hitting its highest point since 1998. Meanwhile, the UK is also grappling with a political crisis, as Keir Starmer faces intense scrutiny following his party's defeat in the local elections.
Finally, the sell-off in government bonds may also stem from competition with corporate debt. Major US tech companies have begun issuing debt to finance AI-related infrastructure. The capital requirements are staggering: Alphabet, Meta, Microsoft, and Amazon are projected to invest $725bn in 2026. These corporations may now be perceived as safer bets than governments that are all over-indebted worldwide.
The critical question now is how long equities can withstand high rates. Yields have been climbing for a month without halting the rally on Wall Street or the broader AI theme. Higher rates typically act as a headwind for stocks, as they weigh on valuations.
The bond market sell-off will also serve as the backdrop for the meeting of G7 Finance Ministers, which convenes today in Paris.
