Long-term borrowing costs across some of the word's biggest economies hit fresh highs because of concerns over inflation, government debt levels and spending on Artificial Intelligence (AI). The interest rate on US borrowing over 30 years hit 5.33% on Tuesday, the highest since June 2007, meanwhile UK long-term debt reached 5.85%. There were similar moves in Germany and Japan.
Interest rates on bonds - which are a type of debt - are known as yields and can directly affect the borrowing costs consumers pay on mortgages, car loans and credit cards. Rising oil prices are main driver behind this recent surge in bond yields, as investors fear inflation could spike again. If that happens, central banks may choose to raise interest rates to cool inflation.
On Tuesday, a barrel of Brent crude, the global benchmark for oil prices, surpassed $90 following growing tensions over the conflict in the Middle East. The recent surge came after President Donald Trump threatened to bomb Oman - a US ally - if it "gets in the way" of talks with Iran to reopen the Strait of Hormuz waterway. The US and Oman have each been negotiating separately with the Iranian government to reopen the key passage which is vital for global oil supply and other trade.
The strait being largely closed for almost six months due to the US-Israel war with Iran has caused oil supply disruption, leading to higher prices. As well as hiking the cost of motor fuel, elevated global oil prices can lead to price rises across the board as companies pass the higher expenses they face to consumers, pushing up inflation. Oil is a key factor in business.
More often than not goods are transported by lorry or van. John Canavan, lead analyst Oxford Economics, told the BBC the inflation risk from higher oil prices, along with high levels of government debt and uncertainity around the vast sums being invested into AI - and when that will pay off - were all playing a part in higher borrowing costs. He said this could lead to higher mortgage rates and borrowing costs for car loans for consumers as a result.
Higher yields, he warned, would mean companies could have to pay more to borrow money and might pass that on to customers. "It adds to the overall inflationary impact," he said, adding that in the longer-term the risk was higher inflation could slow economic growth. Bond investors typically demand higher returns - or yields - if inflation is high or they expect it to be elevated in the future.
Extract — continue reading at the source.
