EPA/ShutterstockIt is not just the wildfire burning in the bond markets, with many countries facing interest rates at multi-decade highs.
The markets lending money to governments appear to be changing more fundamentally too.
Over summer, the message has been made clear: countries will have to pay more to borrow cash.
The immediate reason is the ongoing closure of the Strait of Hormuz and renewed hostilities between the US and Iran, which has pushed up inflation and, in turn, raised expectations of higher interest rates in the world’s major economies.
It was wishful thinking, based on the hope that US President Donald Trump would want the conflict in the Middle East resolved well before Americans go to the polls.
But that has not happened, leaving markets pricing in higher energy prices, a chronic Gulf crisis, higher inflation for longer – and so higher interest rates.
But that is only part of the story.
The bigger picture is rising demand for borrowing across the world – and not just from governments. Big tech companies are turning to the same bond markets to raise hundreds of billions of dollars for investments in AI data centres.
Over $219bn (£162bn) of debt has already been issued this year by the US “hyperscalers” such as Google, Amazon and Meta, nearly a third of it in currencies other than the dollar, including sterling.
The total issued last year was $93bn, while before that it averaged less than $40bn a year. Some expect the tech giants to raise $400-$500bn from the bond markets this year. These are staggering sums, raising competition in the market and pushing up the price for governments.
Looking east, there is another major borrower: Japan.
It has the highest debt burden, relative to its GDP, of the major economies and is the biggest single lender to the US government. Until recently its central bank’s interest rate was zero, but that has crept up to help combat rising inflation.
As a result, its government bond yields have been pushed to 30-year highs. The declining value of the yen complicates things, but the bottom line is that there is a change afoot in the global flow of money.
The biggest factor pushing up rates is the credibility of the borrowing plans set out by major countries. The increase is not based on fears about countries “going bankrupt”.
But it is based on the brutal market equation that if a country wants to borrow more, and to do so without a credible plan, especially if there are doubts over the stability of a given government, it should expect to pay a higher rate.
Influential economists lean on different factors. Mohamed el-Erian told me the AI competition in bond markets was the biggest new factor.
Lord Jim O’Neill, says the recent action has been caused by uncertainty about US policy, and in particular efforts by the US Government to try to manage down surging yields.
This brings us to the UK. The profound and rolling instability of multiple prime ministers, chancellors, policy U-turns and the seeming inability to push through major structural change in this country over the past decades, has attracted a premium.
It was part of Sir Keir Starmer’s strategy to try to take on boring reforms and offer markets stability in a bid to lower borrowing costs.
It was a shock to many in the markets that despite a landslide majority, Labour could not push through plans to cut Britain’s welfare bill. This added to the ups and downs in the gilt markets – the trade in British government debt.
Actually, there are signs of green shoots in the underlying economy. Economic growth has been faster than peers so far in 2026, despite the energy price spike.
Measures of consumer confidence have ticked back up again. The PM is hoping to build on these signs to help rebuild the economy.
But the ongoing rout in global bond markets raises serious questions about the coherence and detail of Burnham’s broader plans.
“More public control” and more support for those struggling with the cost of living sounds like a plan for more spending, while the former could turn off potential investors looking at the country.
Burnham’s former economic adviser, Lord O’Neill, told me yesterday that the PM’s 10-year plan, expected in November, needs to set out how he will tackle “excessive spending”.
Lord O’Neill believes showing investors he can be decisive on the state pension or the welfare bill will give him breathing room to focus on his favoured infrastructure investments.
As interest rates tick up, the trade offs facing the prime minister only get more difficult.
