US Bonds Plummet and Rates Hit Record Levels: Why Nervousness in the Market Spiked

Global sovereign debt is back in the spotlight, though not for good reasons. The 30-year Treasury yields in the US reached their highest level in decades, impacting the rest of the debt market. Beyond the blow caused by the end of the ceasefire in the Middle East, other factors are also influencing investor nervousness, such as sustained fiscal deficits and competition with large tech companies for financing.

The costs of sovereign debt financing are skyrocketing worldwide due to a massive sell-off of bonds. The 30-year Treasury yields reached their highest level since 2007 this week, while their French counterparts hit their highest since 2008 and those in Germany are trading at levels not seen since 2011. The equivalent yields of UK Treasury bonds are approaching 6% --- their highest point since 1997 ---, similar to Japanese bonds of the same maturity.

In its daily report, the Schwab Center for Financial Research (SCFR) explained that the rise in oil prices and yields "usually goes hand in hand with rising prices, and there is growing concern that the Federal Reserve (Fed) will raise rates before the year ends." According to the CME Group's FedWatch tool, there is a 70% probability of at least one rate hike this year.

SCFR analysts also noted that the yields on bonds and stocks on Wall Street now show the most negative correlation since 1997, meaning that when one rises, the other falls. "This implies that the bond market is being guided more by inflation data than by growth data," they stated, adding that the bullish rally experienced by the US stock market for much of the year occurred when market participants seemed relatively confident that the war would end soon. "Now that is unclear and could explain the recent stumbles," they said.

The Blow in Europe: Energy Dependence and Fiscal Deficit

Another structural element behind this massive sell-off is the high deficit of governments. For example, the fiscal deficit of the US is expected to be around 6% of GDP, equivalent to $1.9 trillion, this year. Similarly, France's deficit is projected at 5% and Britain's at 4%.

The international markets analyst from Portfolio Personal Inversores (PPI), Martín Cordeviola, explained to Ámbito that in the European case, the old continent is much more exposed to the energy shock than the US, due to its dependence on oil and gas. "On that more sensitive basis, two local fiscal stories are also built," he explained.

The first case is Germany, "which for years was the most austere issuer in the eurozone," but is now going to issue more debt to finance its infrastructure and defense plans. "In France, the problem is more about political risk," he stated, mentioning "the noise around the negotiation of the 2027 budget and next year's presidential election."

US: Change in Holders and Competition with Tech Companies

However, from ING Bank, they argued that in the US, the fact that the differentials of the 30-year Treasury swaps --- which measure the relative cost of borrowing and long-term credit expectations --- have not widened, "suggests that it is not fiscal concerns driving this movement."

They pointed to another element: the "hyperscalers", the select group of large tech companies that offer cloud computing and infrastructure services on a massive scale, such as Google, Meta, Amazon, and Microsoft.

Cordeviola mentioned that there is currently competition between the US Treasury and the hyperscalers for financing, which is a "novelty" compared to other times. "Hyperscalers are financing AI capex (capital expenditures) with long-term debt, meaning there is greater supply/competition in the long end of the curve," he elaborated in a conversation with this media outlet.

Companies like Alphabet - Google's parent company -, Amazon, and Meta have issued nearly $220 billion in bonds so far this year, which already exceeds more than double the $108 billion issued in all of 2025, according to data from LSEG.

The rise in US bond rates raises alarms.
Depositphotos

On the demand side, the PPI expert mentioned that there has been a change in the nature of Treasury holders: "For decades, much of the US debt was absorbed by official holders, central banks, and sovereign funds. That buyer is insensitive to price, buying by mandate," he explained.

The expert also added that "the portion in official hands fell from 59% to 43%", with an even more marked drop in the long end, "where it went from 63% to 45%". As that holder withdraws, the one who sets the price is the private investor, made up of hedge funds, managers, and commercial banks. "They only enter if the expected return compensates for the risk taken," he stated.

Japan: monetary and fiscal pressure

Cordeviola stated that the issue in the case of Japan "is the most dramatic case because it came from decades of relatively low yields". In fact, this made it much cheaper to finance in yen than in other currencies of first-world countries over the last few decades, giving rise to the yen carry trade, one of the most used forms of liquidity within global financial markets.

On the fiscal side, Cordeviola mentioned the decision of Prime Minister Sanae Takaichi to promote public spending and pause the consumption tax to encourage spending, which has implications for the level of spending in the Japanese economy and doubts about its future solvency. "All this under the framework of an economy where the debt/GDP ratio is the highest in the world," the expert recalled.

On the monetary side, the Bank of Japan (BoJ) "orderly dismantled the framework that kept rates flat for years" and raised them to 1%, their highest level since 1995, with expectations of a new increase at their September meeting.

Moreover, it has been implementing a quantitative adjustment to control the amount of circulating money, having already removed around $727 billion in Japanese government bonds from its balance sheet. This detail is not minor, as the BoJ's holdings are concentrated in the long-term segments, "so as it reduces purchases and withdraws from the market, it impacts the long end of the yield curve."

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