From government interest expenses to AI financing costs, surging global long-term interest rates are reshaping the economic landscape, and the stock market's "immunity" is being tested

Odaily observed that the global bond market slump is pushing up borrowing costs across the entire economy, forcing governments, corporations, and consumers to face the reality that high levels of debt may persist for a long time.

Global government bond yields have climbed to multi-year highs: the yield on Germany’s 10-year government bonds reached its highest level since 2011, Japan’s 10-year yield remained above 3%, the US 10-year Treasury yield hit its highest since November 2023, and UK government bond yields also reached their highest levels since 2008 in recent days.

The latest developments in this selloff reflect the combined effects of massive government bond issuance, an oil price shock reigniting inflation worries, and expectations that central banks could maintain tighter monetary policy for longer.

This trend may represent more than just another fluctuation in the bond markets—its consequences will ripple through the entire economy and financial markets.

Brookings Institution senior fellow Robin Brooks stated, “This is the continuation of a medium- to long-term trend, and it will last for years.”

Natalia Logievski, Managing Director at CIFC Asset Management, also believes there is further room for yields to climb, since a surge in debt issuance is intersecting with resurging inflationary pressures.

Government: Rising Interest Expenses

State Street investment management’s senior fixed income strategist Masahiko Loo noted that governments are among the most sensitive to rising yields. Sovereign debt burdens are already elevated in much of the world, and refinancing maturing debt at higher interest rates will gradually increase interest costs and put fiscal positions under pressure.

Masahiko Loo said, “The most vulnerable sovereigns are those that combine a high fiscal deficit, heavy debt burden, and reliance on external capital. Among developed markets, France especially stands out,” he pointed to the country’s fiscal slippage, lack of political will for fiscal consolidation, and electoral uncertainty.

10-year government bond yields for the UK, US, France, Germany, and Japan

He added, across all emerging markets, countries with “twin deficits” remain especially vulnerable, as rising global yields both push up borrowing costs and increase funding risks.

“When debt, deficits, and external financing needs are intertwined, markets tend to become less forgiving,” he added.

Authorities can attempt to suppress yields via bond buybacks or adjusting the size and maturity profile of new issuances. However, such measures do not address the fundamental mismatch between excessive borrowing and investor demand.

Deutsche Bank wrote in a recent report: “The higher yields go, the more concerning the long-term fiscal trajectory for many countries becomes.”

Japan exemplifies this pressure particularly clearly. Government debt amounts to more than 200% of GDP, making the fiscal position highly sensitive to rising borrowing costs. Estimates suggest that, in fiscal year 2026, debt servicing will account for over 25% of government expenditures.

Corporates: Growth Plans Hit

Corporates will have to pay more for refinancing or raising capital to expand their businesses. Firms with large borrowing needs, weaker balance sheets, or floating-rate debt are particularly vulnerable.

Keeley Teton Advisors portfolio manager Thomas Brown noted that, compared to bigger peers, small-cap companies often hold more floating-rate debt, meaning their interest expenses could rise relatively quickly as rates climb.

“The pressure point is on high-leverage companies used to free money,” Loo said. Following a similar logic, he highlighted commercial real estate, private equity-backed companies, direct lending portfolios, and lower-quality software firms as the sectors most severely impacted. Many of these companies financed themselves under the assumption that capital would remain abundant and cheap.

The artificial intelligence investment boom adds another twist. Tech companies are issuing massive amounts of debt to build data centers and related infrastructure, putting them in direct competition with governments and other corporate borrowers for investor capital.

Larry Holzenthaler, senior portfolio manager at Catalyst Funds, said, “There’s a huge amount of debt coming to market to finance various AI projects, and the issuers seem quite insensitive to price.”

Even for financially healthy companies, higher benchmark rates will push up the cost of capital, potentially rendering certain factories, data centers, acquisitions, and other investment projects economically unviable.

Consumers: K-Shaped Squeeze

Rising longer-term yields pass through to mortgages, auto loans, and other forms of household credit. This burden will not be shared evenly.

Holzenthaler noted, “The long end of the curve really matters because it’s not only increasing the cost of capital for businesses but also for mortgage borrowers and the real estate market.”

Market watchers say lower-income consumers may feel the strain first, since they must allocate a larger portion of their income to debt repayments and essential goods. Wealthier households may benefit from higher returns on savings and are generally better positioned to handle higher monthly payments.

“For consumers, there’s this K-shaped dynamic. In terms of ‘how much of my pay goes toward car loans, mortgages, student loans,’ lower-income groups will feel significantly more pressure than the wealthy,” Holzenthaler added.

As fixed-rate loans mature and households refinance, this effect could gradually manifest. However, if lower-income consumers curb spending under pressure, the impact could spill into the broader economy.

Equity Investors: Facing Yield Pressure

Supported by robust earnings and optimism on AI-driven productivity gains, the stock market has demonstrated resilience. But higher bond yields make safer sovereign debt more attractive relative to equities and reduce the present value of companies’ future earnings for investors.

“At some point, higher yields will become a painful experience for equity markets,” Logievski said.

“Equities have been quite outstanding at ignoring or disregarding rising yields… but eventually, they start to be affected, and I think that’s what’s happening now.”

Nevertheless, the rise in yields has also clearly benefited one group: new bond buyers. Unlike the low-yield environment of the early 21st century, higher coupon income now provides a buffer against further price declines.

Deutsche Bank estimates that the US 10-year Treasury yield could climb to around 5.5% over the next year before the capital losses from falling bond prices outweigh the coupon income received by investors. On a two-year horizon, yields would need to rise to around 6.4% for total returns to turn negative.