Global bond sell-off pushes government borrowing costs to multi-decade highs

Government borrowing costs across major economies hit levels not seen in decades on Tuesday, as a global bond sell-off intensified. The rise was driven by an unusual combination of factors: a huge appetite for funding from American technology companies, large government borrowing requirements, and reduced demand from traditional buyers such as Gulf states and Japan.

Speaking on BBC Two's Newsnight, top economist Mohamed El-Erian said the pressure originated in the United States. "What we've seen is an enormous rise in borrowing costs," he said. "The driver is the US. And within the US, what's happening is that the tech companies in particular are looking for funding that was unimaginable a few years ago."

El-Erian noted that big tech firms are expected to borrow around $800 billion this year, up from roughly $100 billion two years ago. This demand, he said, is "pretty insensitive" to higher interest rates because companies see transformative opportunities in artificial intelligence and fear being left behind. At the same time, governments are also borrowing heavily, while some traditional buyers are stepping back. "In particular, the Gulf countries are no longer buying as many US bonds as they used to," he said. "And also, Japan is needing to sell bonds to protect its currency markets."

The result is a global rise in yields, with the UK among the most exposed. UK 30-year gilt yields reached their highest in decades, reflecting concerns about the country's debt-to-GDP ratio and lack of pooled insurance that eurozone members enjoy. "We are particularly vulnerable," said one panel member, pointing to the UK's high debt levels.

The consequences are already being felt in the US, where mortgage rates have crept towards 7%, hitting first-time buyers and low-income households hardest. El-Erian described the situation as "an indicator of fragility that can expose structural weaknesses," adding that it leaves less fiscal room for governments like the UK's to support growth or respond to shocks.

While the inflationary impulse from tensions in the Gulf has been less than some feared, the real yield, which strips out inflation, has moved sharply. That suggests the pressure comes from strong demand for financing rather than just inflation expectations. El-Erian warned that neither central bank action nor higher prices are likely to deter the main borrowers, meaning high borrowing costs could persist.