Global sovereign bond markets are heading toward one of their weakest months in years as higher energy costs intensify inflation concerns and strong investment in artificial intelligence continues to support economic growth.

The developments are leading investors to prepare for interest rates to stay elevated for an extended period.

Two-year U.S. Treasury yields have increased by almost 60 basis points in September, putting them on track for their largest monthly rise since early 2023.

Borrowing costs have also climbed across major developed economies. Two-year yields in France, Germany, Britain and Australia are set for their largest monthly increases since March, when the war involving Iran caused another energy shock.

Japanese government bond yields, meanwhile, remain near multi-decade highs.

Kenneth Broux, head of corporate research for foreign exchange and rates at Societe Generale, said investors were recognizing that energy and inflation pressures were unlikely to fade quickly.

The rise in yields has generated mixed reactions. Higher government bond yields can make sovereign debt more appealing by providing investors with greater returns. However, concerns over elevated government debt have left some investors wary of longer-dated bonds.

Bond markets will face several important tests in October. Investors are expected to monitor new U.S. employment and inflation figures, negotiations over France’s budget and Britain’s budget plans. Technology companies may also add to borrowing by issuing more debt.

Government bond markets have significant implications for the broader economy because sovereign yields affect borrowing costs for businesses and consumers, including mortgage rates.

Sharp increases in borrowing costs can create broader financial and economic pressures, making developments in bond markets an important consideration for governments and central banks.

The current conditions differ from 2022, when bond returns recorded their worst performance on record. Investors are also concentrating on the absolute level of interest rates, which has remained high as yields continue to move upward.

The rate on the most widely used U.S. home loan recently reached its highest level in more than two years.

The 10-year U.S. Treasury yield has climbed above 5% for the first time since 2007 and is heading toward its largest monthly increase since 2022, with the September rise at around 50 basis points.

Volatility in bond markets has increased as well. The ICE BofA MOVE Index, a measure of bond-market volatility, has risen almost 30% in September, representing its largest monthly increase since March.

Higher energy prices, persistent inflation risks and increased technology investment are combining to reshape expectations for the future direction of interest rates around the world.

Original article