LONDON, Aug 18 (Reuters) - Long-term borrowing costs from the United States to Japan and Germany hit their highest levels in decades on Tuesday, as renewed inflation worries added to nagging concerns about the fiscal pressures facing some of the world's biggest economies.
Thirty-year bond yields in the United States, the world's most systemically crucial government bond market, hit their highest since 2007 as oil prices -- up 50% so far this year -- rose back above $90 a barrel, fanning inflation worries as U.S.-Iran peace hopes faded.
In Japan, inflation angst and expectations that Japan could hike interest rates as early as September pushed 10-year borrowing costs to a three-decade high just under 3%.
In Europe, Germany's 10-year Bund yield touched its highest since 2011 , French yields were at their highest since 2009 and Britain's 30-year borrowing costs neared peaks hit in May that marked the highest levels since 1998. When a bond's yield rises, its price falls.
Kjersti Haugland, chief economist at investment bank DNB Carnegie, said bond markets are entering an era where the inflation and rates outlook is more uncertain and the upside risks are greater, leaving behind the post-financial crisis period of low rates and subdued inflation.
"It coincides with the very high level of government debt in many countries, particularly Japan, the U.S., France and the UK," she said.
Competition for capital from AI hyperscalers — the technology giants building huge data centres — combined with rising budget deficits and, in the United States, concern about clear communication from the Federal Reserve under new Chair Kevin Warsh, exacerbated the selling, analysts said.
The selloff in government bond markets ripples through economies, as sovereign debt sets the benchmark for borrowing costs for companies and other loans such as mortgages.
Rising borrowing costs also tighten financial conditions in general, threatening to curb the economic growth that has helped drive stock markets to record highs.
ENTERING A DANGER ZONE?
U.S. 10-year Treasury yields, at around 4.74% , are trading at levels that in the past have attracted the attention of U.S. officials, with 5% now in focus.
"This will be very important, not just for bond markets, but also other financial assets as any break higher is likely to undermine confidence," said Zurich Insurance Group's chief market strategist Guy Miller.
"Given the importance of this level, we are likely to see it defended by the U.S. Treasury."
Some analysts reckon the Treasury's unusual decision to sell euros and not dollars in recent joint intervention with Japan to bolster a weak yen suggests it does not want bond market strains worsened by foreign central banks selling Treasuries to fund currency-support operations.
Foreign holdings of U.S. Treasuries slid in June, Treasury Department data showed on Monday, led by declines in the holdings of Japan — the biggest foreign holder of U.S. bonds — the UK and China.
Two recent Treasury auctions also drew attention for their yields as the sale of 10-year notes cleared at a yield of 4.683%, the highest in 19 years, while the 30-year bond auction stopped at 5.216%, a 25-year peak.
Rising tariff refunds have meanwhile put U.S. public finances under further strain, after the Supreme Court struck down the emergency tariffs imposed by President Donald Trump last year.
CHANGING DYNAMICS IN JAPAN
Rising bond yields in Japan, where 30-year borrowing costs are just above 4% , are also starting to draw in Japanese investors, traditionally big buyers of U.S. debt, creating another headwind for the U.S. bond market.
Charu Chanana, chief investment strategist at Saxo Bank in Singapore, said Japanese bond yields were at much more competitive levels, and she noted the fall in Japan's U.S. bond holdings in June.
"That doesn't mean Japan is abandoning Treasuries, but it does mean Washington can no longer assume that foreign demand will absorb additional supply at yesterday's yields."
For some bond investors, rising yields were making the market attractive.
“We are long on duration. I don't expect it (the current bond selloff) will last," said Pictet senior investment adviser Christopher Dembik.
In Europe, where high government spending and high debt have weighed on France and Britain, concern that climate events will add to spending pressures was also a factor, along with inflation and stronger-than-expected growth.
“It's not just oil that people are looking at, but there's a broader inflation picture that kind of keeps the ECB (European Central Bank) hawkish," said ING senior rates strategist Benjamin Schroeder.
"And then you've got those supply chain disruptions in Germany with the heat waves leading to those extreme lows in the Rhine levels."
Reporting by Dhara Ranasinghe, Samuel Indyk and Harry Robertson in London, Stefano Rebaudo in Milan, and Gregor Stuart Hunter in Singapore; Editing by Elisa Martinuzzi, Susan Fenton and Hugh Lawson
