Governments across major economies are paying more to borrow, as renewed US-Iran hostilities, a surge in tech-sector bond issuance, and Japan's rising yields combine to push up global interest rates. In the UK, the rout in gilt markets is adding pressure on Prime Minister Burnham's spending plans.
Governments in the world's major economies are facing a fresh jump in borrowing costs, and the causes now reach well beyond the usual drivers of interest-rate expectations. The ongoing closure of the Strait of Hormuz and renewed hostilities between the US and Iran have pushed up inflation, lifting expectations of higher interest rates across major economies. Markets had bet that tensions would ease before the US midterm elections in November, but that has not happened, leaving investors pricing in higher energy costs and inflation for longer.
Tech giants pile into bond markets
Rising government borrowing is only part of the story. Big technology companies are turning to the same bond markets to fund investments in AI data centres, competing directly with sovereign borrowers for capital. US "hyperscalers" including Google, Amazon and Meta have already issued over $219bn (£162bn) of debt this year, with nearly a third of it in currencies other than the dollar, including sterling.
That compares with $93bn issued last year, and less than $40bn a year before that. Some now expect tech giants to raise $400bn to $500bn from bond markets this year, pushing up the price of borrowing for governments as well.
Japan's yields hit 30-year highs
Japan illustrates the shift most starkly. It carries the highest debt burden relative to GDP among major economies and is the biggest single lender to the US government, while its central bank's once-zero interest rate has crept up to combat inflation. As a result, Japanese government bond yields have been pushed to 30-year highs, and the yen's declining value complicates the picture further.
Economists point to different causes behind the wider rout. Mohamed el-Erian sees the AI-driven competition for bond capital as the biggest new factor, while Lord Jim O'Neill points instead to uncertainty over US policy, particularly efforts by the US government to manage down surging yields.
Burnham's spending plans face scrutiny
The instability has also reached UK politics. Sir Keir Starmer's strategy relied on pushing through reforms to offer markets stability and lower borrowing costs, but Labour's failure to cut the UK's welfare bill despite a landslide majority added to swings in the gilt market. Still, UK economic growth has run faster than peers so far in 2026 despite the energy price spike, and consumer confidence has ticked back up.
Even so, the bond market rout raises questions about current Prime Minister Burnham's broader plans. According to BBC News, Lord O'Neill, Burnham's former economic adviser, says the PM's 10-year plan, expected in November, needs to set out how he will tackle "excessive spending". O'Neill believes decisive action on the state pension or welfare bill would give Burnham room to focus on his preferred infrastructure investments.
Source: BBC News
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