The yield on the 10-year US Treasury note rose to 5.34% on Thursday, its highest level since 2002, as investors continued to sell government bonds across major economies, Reuters reported. The benchmark yield has also posted its largest quarterly increase of this century, covering July to September.

JUST IN 🚨: U.S. 10-Year Treasury Yield closes at highest level since 2001 👀 pic.twitter.com/eGO5gtrj8A

— Barchart (@Barchart) September 30, 2026

A bond's yield is the annual return an investor receives relative to the bond's current price. When investors sell bonds, prices fall and yields rise, so higher yields mean higher borrowing costs for governments.

The US 10-year yield is a reference point for mortgage rates, business loans and the valuation of many other assets.

The selloff is now reaching equity markets. Europe's STOXX 600 index fell to its lowest level since June, and European bank shares dropped by as much as 3%. S&P 500 futures were slightly higher.

What is pushing yields up

A report by Reuters points to two main drivers pushing yields higher. For one, higher energy prices are raising inflation, which erodes the value of the fixed payments a bond makes, so investors demand a higher yield to hold it. Separately, the boom in artificial intelligence and data center construction has lifted expectations for economic growth and for the level at which short-term interest rates will eventually settle.

Recent data supports the growth picture. Factory activity expanded across Europe and Asia last month. "Stronger growth has encouraged markets to conclude that the economy can sustain higher rates for longer," Julius Baer fixed income analyst Afonso Borges told Reuters.

Inflation figures were mixed. European data released Wednesday came in above expectations, while the US reading cooled slightly. HSBC chief Asia economist Fred Neumann said a softer US number was not enough to change market sentiment. "There is more than inflation that has bond investors worried these days," he told Reuters.

Inflation numbers came out today, and the official story is that inflation went down. What the headline number doesn't tell you is that the government changed how inflation is calculated in the same release. A month ago, they said July inflation was 3.7%. Today, they recalculated… pic.twitter.com/VTd2R2tNIU

— theleahfiles (@leahfiles) October 1, 2026

Neumann argued that central banks, many of which have missed their inflation targets for years, need to act more decisively to rebuild credibility. Until they do, he said, bond markets will demand a premium for lending over longer periods. That extra yield, known as a term premium, compensates investors for the risk of tying up money for 10 or 30 years.

Demand for long-dated bonds is also weak. State Street's Tim Graf said the bank's data shows institutional investors have shown minimal interest in buying them over the past 18 months.

Rate hike expectations

Traders have abandoned earlier bets that the US Federal Reserve would cut interest rates this year. After a rate hike last month, they now expect at least three more increases before mid-2027.

The European Central Bank has separately raised rates twice this year, and markets are pricing in three more increases of 25 basis points each by mid-2027. 

Among highly indebted countries, France has seen some of the steepest bond declines. Its 10-year yield briefly rose 10 basis points on Thursday to 4.96%, close to the 5% threshold. French government bonds, known as OATs, had their worst quarter since 1987 between June and September.

The timing coincides with the government's presentation of its 2027 budget bill on Thursday. Reuters reported that unpopular spending cuts and tax measures may struggle to pass parliament. "French OATs are getting beaten up because it's budget time and it's messy," Graf said.

The gap between French and German 10-year yields is at its widest since the euro zone debt crisis of the 2010s. Investors treat German bonds as the euro zone's safest benchmark, so a wider gap means they demand more compensation to hold French debt.

Good Morning from Germany, where the bond-market divide w/France is the widest since the 2012 Euro crisis. France now pays over 120bps more than Germany to borrow for 10yrs, almost double the premium four months ago. Political turmoil and fiscal fears are driving the countries… pic.twitter.com/ezTt1wHG4c

— Holger Zschaepitz (@Schuldensuehner) September 30, 2026

The cost of credit default swaps on French debt, a form of insurance against a government failing to repay, is at its highest since 2013.

UK, Japan also under strain

In Britain, the 30-year government bond yield rose above 6% on Thursday, its highest since 1998. Separate data showed house prices growing at their slowest pace in nearly two years, pointing to the effect of higher rates on the wider economy.

BREAKING: The UK’s 30Y Government Bond yield rises to 6.02%, its highest level since January 1997.

That’s a total of +564 basis points since the low seen in 2020. pic.twitter.com/U3qq3hXE0i

— The Kobeissi Letter (@KobeissiLetter) October 1, 2026

In Japan, where inflation has taken hold after decades of falling prices, government bond yields have risen by double-digit amounts for a fifth consecutive quarter, which Reuters described as unprecedented.

Global government bond markets came under renewed pressure as yields in Japan and Australia approached multi-decade highs following a sell-off that pushed US Treasuries to their worst month in four years. https://t.co/pv8xHPwXW4 pic.twitter.com/78rm4UFrAI

— Financial Times (@FT) October 1, 2026

A growing interest bill for governments

Higher yields feed through to public finances. Governments pay current market rates when they issue new debt to cover deficits or replace maturing bonds, and more spending on interest leaves less for other budget items.

The Institute of International Finance, based in Washington, estimated that advanced economies paid more than $3.3 trillion in interest on internationally traded government bonds over the past year. That is higher than estimated global spending on AI ($2.6 trillion), defense ($3.1 trillion) and clean energy ($2.3 trillion).

Higher rates raise financing costs for companies and mortgage borrowers. Equities have so far held up better than bonds, partly because of the strong growth data, but Thursday showed signs of change.

An index of credit default swaps on junk bonds, which are issued by companies with weaker credit ratings, reached its highest level since early April.

"We should be seeing other assets depreciate in price," said Andrew Lilley, chief rates strategist at Barrenjoey in Sydney, to Reuters. "It is over to them now."