Global borrowing costs hit new highs due to oil, artificial intelligence and inflation

Long-term borrowing costs in some of the world’s largest economies have reached new highs due to concerns about inflation, public debt levels and spending on Artificial Intelligence (AI).

The interest rate on 30-year US loans hit 5.33% on Tuesday, the highest since June 2007, while UK long-term debt hit 5.85%. There were similar movements 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 that consumers pay for mortgages, auto loans and credit cards.

Rising oil prices are the main driver of this recent rise in bond yields, as investors fear inflation could spike again.

If that happens, central banks could choose to raise interest rates to cool inflation.

On Tuesday, a barrel of Brent crude, the global benchmark for oil prices, exceeded $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 United States and Oman have been negotiating separately with the Iranian government to reopen the key passage that is vital to global oil supplies and other trade.

The fact that the strait is virtually closed for almost six months due to the US-Israel war with Iran has caused a disruption in oil supplies, causing prices to rise.

In addition to increasing the cost of motor fuel, high global oil prices can lead to price increases across the board as companies pass on the increased expenses they face to consumers, driving up inflation.

Oil is a key factor in business. Most of the time the transportation of goods is carried out by truck or van.

John Canavan, senior analyst at Oxford Economics, told the BBC that inflation risk from higher oil prices, along with high levels of public debt and uncertainty around the huge sums being invested in AI – and when they will pay off – were playing a role in higher borrowing costs.

He said this could lead to higher mortgage rates and borrowing costs for auto loans for consumers as a result.

He warned that higher yields would mean companies could have to pay more to borrow money and could pass it on to customers.

“It adds to the overall inflationary impact,” he said, adding that in the long term the risk was that higher inflation could slow economic growth.

Bond investors typically demand higher returns if inflation is high or they expect it to be high in the future.

Governments and corporations sell bonds – essentially a promissory note – to raise money to spend, and in return they pay interest.

In addition to inflation fears, Canavan said there had been a “push back” around the world from bond investors over the overall financial policies and spending plans of various governments.

The UK’s financial position and debt levels have prompted Prime Minister Andy Burnham to assure bond markets that he is committed to respecting the government’s existing borrowing limits, known as fiscal rules.

Borrowing costs rose when he took over the Labor leadership from Sir Keir Starmer this summer.

Before the compromises on fiscal rules, investors had seen Burnham as more likely to increase Britain’s already high public debt, especially after her comments last year that the UK had to “get over this thing of being stuck in the bond markets”.

Economists at Capital Economics said in a note that the biggest increases in long-term borrowing costs were being seen in “the United States, the United Kingdom, France, Italy and Japan, where, to varying degrees, the fiscal outlook is most problematic.”

They said the situation did not represent a “bond market crisis”, but added: “There are rational reasons for investors to demand higher yields on long-term government debt: increased geopolitical and inflation uncertainty, doubts about US monetary policy and unsustainable fiscal positions.”

Canavan said long-term borrowing costs in the US were also being driven by a “record pace” of corporate borrowing in recent weeks, mainly for the development and construction of artificial intelligence and data centres.

However, with uncertainty over the hundreds of billions of dollars being invested in AI, as well as potential risks, investors are demanding higher loan yields.

“The yields worry people because it portends a tighter environment and it will be more expensive to borrow money,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.

“Especially with this whole AI thing, where the timing of paying back the money is uncertain. It creates a nervous environment for investors.”