The global "debt storm" is raging, putting stress tests on risk asset pricing

According to Zhitong Finance APP, the global bond market is undergoing a rare, synchronized multi-country sell-off. From Washington to Tokyo to Frankfurt, long-term government bond yields are soaring to their highest levels in decades at an astonishing rate, signaling a profound shift in the logic of global capital pricing.

On Monday, August 17, the yield on the 30-year U.S. Treasury briefly broke through 5.31% during trading, marking its highest level since June 2007—the eve of the global financial crisis. Meanwhile, the yield on Japan’s 10-year government bond approached 3%, touching this level for the first time since September 1996; Germany's 10-year government bond yield rose above 3.22%, setting a new high since May 2011; France's 10-year yield broke through 4% for the first time since 2009. The UK’s 10-year yield is also approaching 6%.

This wave of bond sell-offs spanning three continents is not driven by a single factor, but is the result of multiple structural forces working in concert: record-breaking bond issuances by mega-cap AI companies, persistently expanding government budget deficits, energy prices fueled by Middle East conflicts, and declining demand from Japan, the world’s largest holder of U.S. Treasuries. This “term premium revolution” is redefining the benchmark for global asset pricing.

“Global Benchmark for Asset Pricing”: U.S. 30-Year Treasury Yield Returns to 2007 Levels, Pressured by Both Budget Deficits and AI Bond Issuance

The United States is at the epicenter of this bond sell-off storm. On Monday, the 30-year Treasury yield broke above 5.31%, reaching a nearly 19-year high. The 10-year yield climbed in tandem to around 4.7%. The 30-year yield had already surged nearly 40 basis points last month, marking the largest monthly increase since December 2024.

The forces driving the sell-off in U.S. Treasuries stem from two major supply-side surges. The first is the massive federal budget deficit—expected to reach $1.9 trillion for fiscal year 2026, nearly 6% of GDP—constantly pushing up Treasury supply. The second is a record AI bond issuance wave. Since 2026, AI mega-cap tech giants such as Alphabet, Amazon, and Meta have raised nearly $220 billion from bond financing. J.P. Morgan has raised its 2026 forecast for TMT (tech, media, telecom) USD bond issuance by about 20% to $540 billion. AI bonds from large tech companies account for about 25% of U.S. Treasury net long-term issuance.

This supply shock is pushing up overall financing costs. Alphabet’s 30-year bond yield is now at 6.4%, 1.15 percentage points higher than U.S. Treasuries of the same tenor. At the same time, data released by the U.S. Treasury on Monday showed that the total holdings of U.S. Treasuries by foreign investors fell from $9.371 trillion in May to $9.299 trillion in June. Japan, the largest overseas holder of U.S. debt, reduced its holdings to $1.116 trillion in June, cutting $26.4 billion in a single month.

“Largest Buyer of U.S. Treasuries”: Japanese 10-Year Yield Nears 3%, a “Rate Normalization” Not Seen in 30 Years

The Japanese bond market is experiencing a historic rate normalization. On Tuesday, the yield on the 10-year Japanese government bond rose for a seventh consecutive trading day, peaking at 2.945%—a high not seen since September 1996. The 30-year Japanese bond yield rose to about 4.06%.

The main driver behind this rally is strong expectations that the Bank of Japan will accelerate interest rate hikes. The July meeting minutes have sent strong hawkish signals—multiple committee members called for “accelerating rate hikes” and warned that “the risk of waiting is no longer marginal.” Overnight swap data shows the market sees about a two-thirds chance the BOJ will hike rates in September, and a 96% chance for October.

The rise in domestic yields is triggering a global reallocation of capital. With Japanese 30-year bond yields climbing to around 4%, Japanese investors—historically the largest buyers of U.S. Treasuries—are being enticed to repatriate capital. In June, Japan’s holdings of U.S. Treasuries fell to $1.116 trillion from $1.143 trillion in May. Saxo Bank’s Chief Investment Strategist, Charu Chanana, noted: “This does not mean Japan is abandoning U.S. Treasuries, but it does mean Washington can no longer assume foreign demand will absorb new supply at yesterday’s yields.”

Europe: Germany and France Both Reach Multi-Year Highs, Fiscal Concerns Spread Rapidly

The European bond market has been unable to escape the turmoil. On Monday, Germany’s 10-year yield closed at 3.223%, close to the Q2 2011 peak of 3.505%. France’s 10-year yield once broke through 4.05%, up about 11 basis points intraday, setting a new peak since 2009. The 30-year French yield also rose to 4.86%, returning to near 20-year highs.

Market pressure in Europe is spreading from Germany to other major economies like France. Concerns over France’s high fiscal deficit and debt burden continue to grow. In addition, rising energy costs due to Middle East conflicts and the resulting inflationary pressures are also seen as key factors driving the sell-off in European bonds.

Shared Structural Forces: A Global “Term Premium Revolution”

While domestic factors vary by country, the fundamental forces pushing long-term yields higher are clearly global in nature.

First, inflation anxiety is back. With oil back above $90 per barrel and hopes for U.S.-Iran peace fading, concerns over persistently high inflation are mounting in the market.

Second, “capital competition” between AI bond issuance and fiscal deficits. As Golden Finance Data observes, long-term bonds have become the epicenter of investor anxiety: “Concerns ranging from inflation to the debt-laden AI boom are all intensifying in this market.” The huge financing demand from AI companies and continuous debt issuance plans from governments are competing for limited capital.

Third, weakening demand from traditional buyers. Changes in market and demographic structures are weakening demand from buyers who were once stable. Japanese investors are repatriating funds as domestic yields rise, further reducing demand for U.S. and other overseas assets.

Fourth, inflation persistently above target. For the past five years, inflation has been persistently higher than the Federal Reserve’s 2% target. Investors are thus demanding a higher risk premium for long-term government bonds.

Market Effects and Outlook

The surge in long-term borrowing costs is triggering knock-on effects across the wider economy. Sovereign bond yields are the benchmark for corporate loans and mortgages. With the average fixed 30-year mortgage rate climbing to 6.69%, financing conditions for businesses and households are tightening significantly.

Currently, the market sees the 5.0%—5.3% range for the U.S. 10-year Treasury yield as a global core warning line. KB Securities Chief Strategist Lee Eun-taek has cautioned that if the 10-year yield continues to break above 5% (matching the 2007 high) or even rise to 5.3% (a 25-year high), it would drive global capital away from “risk-on” to “capital preservation” mode, possibly triggering a phase of capital contraction for the AI and big tech sectors.

Saxo Bank’s Chief Investment Strategist Charu Chanana said: “The market is demanding a higher term premium for holding long-term government bonds.” Chris Iggo, Chief Investment Officer at AXA IM Core, pointed out: “It’s difficult to know what yield level would improve the total return outlook for longer-dated fixed-income assets. The only thing that might change this situation is either suddenly weaker economic data, or some sort of external shock. The latter seems more likely than the former.”

As of August 18, this global wave of bond selling has spread from the U.S. to European and Asian markets. Under the triple pressures of the AI bond issuance wave, massive budget deficits, and geopolitical risks, long-term borrowing costs—the “anchor” for global asset pricing—may require a more prolonged period of recalibration, and the impact on equities should not be underestimated.

Transmission Mechanisms: Three Ways Higher Treasury Yields May Hit the AI Bull Market

Path 1: Valuation Reassessment—Higher Discount Rates, Lower Present Value. Long-end U.S. Treasury yields are the anchor for global risk asset pricing. When the 30-year Treasury yield jumps from below 5% to above 5.3%, valuation models for all growth assets that rely on future cash flows must be recalculated. AI companies—especially hardware and model developers that have not yet achieved stable profits—are far more sensitive to discount rate changes than traditional industries. The expanded pre-market drop in U.S. equity futures (Nasdaq -1%, S&P -0.4%) is an immediate reflection of this pressure.

Path 2: Rising Financing Costs—Debt-Driven AI Expansion Under Pressure. AI infrastructure expansion is highly dependent on debt financing. Over the past week, the 30-year U.S. Treasury yield jumped from below 5% to over 5.3%, meaning any long-term, debt-financed AI infrastructure project will now face higher interest costs. KB Securities Chief Strategist Lee Eun-taek noted that while big tech firms may continue investing to stay competitive in the AI race, higher rates could prompt financial institutions providing funding to scale back financing.

Path 3: Reversal of Capital Flows—Funds Return from Emerging Markets to Treasuries. When the risk-free rate rises above 5%, Treasuries themselves become an extremely attractive asset class. The pressure for funds to flow from emerging market equities back to U.S. Treasuries intensifies. On August 18, Korean KOSPI institutional investors net sold 785.4 billion KRW in a single day, while foreign investors and retailers registered net buys of 86.5 billion KRW and 731 billion KRW respectively—the large-scale institutional outflows are a microcosm of this logic.