European bond yields hit multi-year highs as global sell-off continues

Government bond yields jumped again this week, with some reaching levels last recorded around the global financial crisis, as the escalating conflict in the Middle East threatens to keep energy prices and therefore inflation elevated.With the conflict showing no sign of ending, investors are bracing for another surge in inflation that could put pressure on central banks to tighten monetary policy further, making borrowing more expensive.The outlook for crude supplies has deteriorated further after Yemen’s Iran-backed Houthi rebels hit several Saudi energy targets and advanced towards the Bab el-Mandeb Strait.The waterway is a key alternative route for global energy shipments while the Strait of Hormuz remains effectively closed and fighting between US forces and Iran shows no sign of easing.International benchmark Brent crude has traded above $100 a barrel in recent days.

On Friday morning, the front-month contract was trading just below $106 a barrel.Government borrowing costs have risen rapidly in Europe, after the European Central Bank raised interest rates on Thursday, lifting its deposit rate from 2.25% to 2.5%, and warned that inflation could remain “well above target for an extended period”. The higher inflation forecast and the ECB’s tougher-than-expected tone led investors to increase their expectations of further rate rises.Germany’s 10-year Bund yield was around 3.5% on Friday morning.

The equivalent French yield was about 94 basis points higher, at around 4.44%. Italian 10-year yields stood at approximately 4.37%, while their Spanish equivalents were around 3.96%. The yield on the UK’s 10-year government bond eased towards 5.35% on Friday as energy prices retreated from Thursday’s highs ahead of an important US inflation report.The 10-year gilt yield had reached 5.378% on Thursday, its highest level since 2007.

Yields on 20- and 30-year gilts climbed to 5.895% and 5.948% respectively, their highest levels since 1998. At the same time, long-term US Treasury yields reached new multi-year highs following data showing an increase in US wholesale inflation, fuelling expectations that the US Federal Reserve could raise interest rates next week.The 30-year US Treasury yield climbed above 5.38% on Friday, its highest level since 2007.

The US 10-year Treasury yield approached the closely watched 5% mark and was trading at around 4.95% on Friday morning in Europe, close to its highest level in three years.Additional pressure came after the US Treasury bought back $5.2 billion (€4.5 billion) of bonds, below the operation’s $6 billion cap and less than half the $10.5 billion offered by investors.In Asia, Japan’s 10-year government bond yield rose to around 2.98%, just below the 3% level it reached earlier this month for the first time since 1996.

AI-related debt competes for investor capitalGovernments are seeking to attract investors at a time when enormous amounts of artificial intelligence-related debt are also coming onto global markets.Major hyperscalers, including Alphabet and Amazon, have issued more than $200 billion (€172 billion) of debt so far in 2026, more than twice the amount raised during the whole of last year, according to LSEG data reported by Reuters.A broader Goldman Sachs estimate, which includes debt connected to data centres and other AI infrastructure, put AI-related issuance at nearly $500 billion (€431 billion) by early August.US technology companies are increasingly turning to the eurozone bond market to finance their investments.

They are expected to require more than $1 trillion (€862 billion) in total capital expenditure by 2028, according to an ECB blog post published on 31 August.The euro accounts for close to 10% of the outstanding bonds issued by these hyperscalers. Their arrival gives European bond investors greater exposure to technology companies.This is particularly significant because technology makes up a much smaller proportion of eurozone bond indices: its weight is roughly one-third of that in comparable US indices.ECB researchers said the growing presence of hyperscalers could eventually push up borrowing costs across different sectors.

Investors may sell or avoid other bonds to make room in their portfolios for large technology-company issues, forcing competing borrowers to offer higher yields.The researchers said this pressure could potentially spread to government and supranational bonds. However, they stressed that no such spillovers were evident in the eurozone at the time of their analysis, reflecting the still-limited scale of big-tech issuance and the resilience of sovereign bond markets.