Long-term rates surge, signaling warning to financial markets and global economy

Long-term interest rates are surging across developed economies, including the United States, Japan, and Europe, prompting concerns about their impact on global financial markets and economic stability. The 30-year Treasury yield in the US recently hit 5.29%, its highest point since June 2007, while Japan, Germany, and South Korea have also seen significant increases.

Traditionally, long-term rates rise when economic prospects improve, demand for funds increases, or inflation is expected to rise, leading central banks to hike benchmark rates. However, the current situation is unusual, with rates climbing despite dim economic outlooks and low expectations of Federal Reserve rate hikes. The primary drivers appear to be heightened inflation expectations and, more significantly, the fiscal challenges faced by governments and the massive capital expenditures of major technology firms.

Governments in developed nations have increased fiscal deficits to stimulate their economies post-pandemic. In the US, the Congressional Budget Office projects a deficit of 5.8% of GDP in 2026, with government debt reaching 100.8% of GDP. Japan, already burdened with high debt, is also expanding its fiscal policy, further pressuring bond markets. Additionally, rising oil prices due to the Iran conflict exacerbate inflation, prompting governments to increase spending on subsidies, which in turn worsens fiscal deficits.

A significant factor contributing to the rise in long-term rates is the aggressive bond issuance by hyperscale tech companies in the US, such as Amazon, Alphabet, Microsoft, and Oracle. These companies are undertaking massive capital expenditures, projected to reach $892 billion by 2027. To fund these investments, they are issuing corporate bonds at an increasing rate, with issuance expected to hit $400 billion by 2027. These corporate bonds often carry higher interest rates than US Treasuries, further increasing demand for higher yields and pushing up long-term rates across the market.