Long-term borrowing costs across major economies touched multi-decade highs on Tuesday, as a confluence of inflation concerns, fiscal deficit anxieties, and a surge in AI-related bond issuance put widespread pressure on government debt markets.

In the United States, the 30-year Treasury yield spiked to 5.33%, its highest level since 2007, having traded below 5% at the start of last month. Yields move inversely to bond prices. European long-dated debt also saw upward pressure, with the German 30-year yield rising 0.03 percentage points to 3.78%, the highest since the eurozone crisis in 2011, while the French equivalent climbed 0.03 percentage points to 4.9%, a level not seen since 2008.

Where the pressure is building

"In recent days, long-end yields have largely followed oil prices," said Mohit Kumar, chief European economist at Jefferies. "Once oil prices move above $90, inflation concerns become the dominant market narrative." In the UK, the 30-year gilt yield rose as much as 0.04 percentage points to 5.86%, edging closer to the post-1998 high recorded during the early stages of the Iran conflict.

Japan's 30-year yield climbed 0.08 percentage points to 4.16%, approaching its historical peak. Since the outbreak of the US-Iran conflict earlier this year, government borrowing costs have risen sharply. Higher energy prices have stoked fears of a persistent inflation shock globally. Brent crude closed above $90 a barrel on Monday for the first time in two weeks, and traded near $91 on Tuesday, adding downward pressure on government bonds.

"Fiscal concerns remain very much present," Kumar added. Government debt levels have ballooned in recent weeks, continuously pushing up long-term borrowing costs. US debt has approached $40 trillion, with investors worried that governments may be forced to expand fiscal spending further to shield businesses and households from the economic impact of high energy prices.

A closely watched survey of global fund managers by Bank of America released Tuesday showed bonds remain the most underweight asset class relative to benchmark allocations. However, the same survey indicated equity allocations among fund managers are at their highest level since 2021.

"The worsening situation in the Middle East has likely amplified market concerns about inflation and the US fiscal position," said Derek Halpenny, head of global markets research at MUFG. "There is absolutely no domestic will to improve the country's fiscal situation, and this is putting increasing pressure on the long end of the yield curve."

The renewed bond selloff on Tuesday, combined with higher oil prices, also weighed on equities. S&P 500 and Nasdaq 100 futures fell 0.5% and 1.2%, respectively. The rise in long-term yields means the US government had to pay the highest interest in over a decade when it sold 30-year bonds last week.

Peter Schaffrik, global macro strategist at RBC Capital Markets, noted that some weaker US economic data released last week, including non-farm payrolls and retail sales figures, has further heightened investor concerns about long-dated bonds. "The fiscal problem remains unresolved in the medium term," Schaffrik said. "If deficits remain high while economic growth begins to slow, how do you maintain fiscal sustainability?" He added that rising long-term borrowing costs are "a multi-year trend that has not yet ended."

Key drivers behind the selloff

Anshul Pradhan, head of US rates research at Barclays, identified three key factors behind the selloff in long-dated US Treasuries: "the fiscal deficit outlook, AI-related corporate bond issuance, and a shift in the buyer base for US debt." Large technology companies are increasingly tapping overseas debt markets to finance massive AI investments, particularly favoring long-dated bonds. Barclays expects total investment-grade bond issuance to hit a record $1.9 trillion in 2026, up from $1.44 trillion last year.

Pradhan noted that on the long end of the yield curve, "the scale and tenor of AI-related corporate borrowing" means "investors require higher risk compensation to absorb the supply of corporate and government debt." Halpenny of MUFG added: "The unprecedented capital demand to fund AI investments is certainly playing a role in this as well."

Global government bond yield curves have steepened in tandem with the selloff in long-dated bonds, with the spread between short-term and long-term borrowing costs widening. Some analysts say the prevalence of "curve steepening trades" — where investors bet that the yield gap between short and long maturities will continue to widen — is itself driving long-end yields higher. Evelyn Gomez-Lichti, multi-asset strategist at Mizuho, noted: "Curve steepening remains the dominant market narrative, and for now, it's hard to fight against that trend."