Escalating tensions in the Middle East and soaring oil prices have triggered the most intense sell-off in global bond markets in decades. The yield on 10-year US Treasury bonds rose to 4.81%, while the yield on 10-year German bonds hit a new high since 2011. Yields on British and Australian government bonds also reached multi-year highs. This article uses Japanese bonds as a starting point to analyze the causes and transmission logic of this global debt crisis.

Japan's Dilemma: The Double Squeeze of Fiscal Expansion and Interest Rate Hike Expectations

The Japanese bond market is a microcosm of the global capital flight from sovereign bonds. The yield on 10-year Japanese government bonds has broken through 3%, returning to levels seen thirty years ago. Since taking office, the Sanae Takaichi government has abandoned its annual basic fiscal balance target, shifting towards aggressive fiscal expansion: the food consumption tax cut in April next year is expected to result in an annual tax revenue loss of 4.3 trillion yen; the total budget request for the general account in fiscal year 2027 is as high as 143 trillion yen, an increase of approximately 20 trillion yen from the initial budget of the previous fiscal year. The consequences are already evident: in the fiscal year 2027 budget request, the principal and interest payments on government bonds reach 36.63 trillion yen, exceeding social security expenditures such as pensions and healthcare for the first time. The higher the government's debt, the higher the interest rates needed to maintain the debt issuance. The government has raised the assumed interest rate for its debt cost calculations to 3.8%. If market yields continue to rise, the fiscal burden will further increase, and higher long-term interest rates will also suppress corporate capital expenditures, impacting the government's growth strategy.

AI's funding drain and the profit dilemma of traditional industries

Beyond geopolitical factors and reflation expectations, another driving force behind this sell-off is the tech sector: the AI investment boom. Global tech giants are aggressively expanding capital expenditures to seize early AI opportunities, raising funds for infrastructure construction such as data centers through the issuance of high-yield corporate bonds. This massive financing demand is acting like a pump, drawing limited global liquidity into the AI sector and raising the opportunity cost of capital across the entire market. In contrast, most traditional industries are facing a triple squeeze from high inflation, high interest rates, and rising costs. With profitability insufficient to cover high financing costs, companies are forced to reduce capital expenditures, leading to generally weakened profit expectations and a fundamental shift in capital flows: security is no longer an absolute safeguard for government bonds; capital is converging on AI infrastructure with high growth potential.

Key Analysis: Is AI a way to steal money or a way to stem losses from a debt crisis?

The primary drivers of this round of bond market sell-offs are deteriorating government debt and sticky inflation, but AI investment undeniably acts as a powerful catalyst. Government debt expansion and reflation bring credit and inflation penalties. US public debt has surpassed $40 trillion, exceeding 120% of GDP; French sovereign debt is approximately 117% of GDP; and Japanese government debt is more than twice its GDP. When the Federal Reserve and the European Central Bank maintain a hawkish stance to suppress inflation, investors realize that holding long-term sovereign bonds means continuous depreciation of book value and erosion of purchasing power. Selling bonds and demanding higher yields is a rational choice for investors to hedge against fiscal risk and inflationary erosion. The mainstream market view is that the US 10-year yield needs to be close to 5% to be sufficiently attractive. AI investment, however, increases opportunity costs; the high-yield corporate bonds and high-growth expectations of tech giants provide alternatives for funds flowing out of the bond market. Since AI infrastructure can offer higher expected returns, investors are naturally less willing to hold sovereign bonds with annualized returns of 3%-4% and facing fiscal risks. In short, the root causes of this round of sell-offs are the deeply entrenched government debt and sticky inflation, while AI's ability to absorb capital and the supply of corporate bonds have accelerated this process. The era of global low interest rates has completely ended, and the painful period of high financing costs has only just begun.

Chain Reaction: Asset Repricing and Stagflation Risk

Global risk-free interest rates have risen to historic highs, reshaping the discount rate foundation for financial asset pricing. High financing costs are not only forcing valuations of overvalued tech stocks to be revised downwards, but also creating a capital drain on the real economy—traditional industries such as manufacturing, consumption, and real estate are reducing investment and employment due to their inability to bear high interest rates, leading to a shrinking government tax base. Under the triple blow of high inflation, shrinking traditional industries, and depleted government finances, the global economy is accelerating towards stagflation. In this process, the pricing logic of gold is being restructured. In the short term, as a non-interest-bearing asset, high real interest rates will increase the cost of holding gold, making it easier for funds to flow into high-yield fixed-income assets. However, the core of this round of bond market sell-offs is runaway government debt and inflation stickiness. Even without excessive money supply, cost-push stagflation caused by geopolitical conflicts and soaring oil prices will still create a vicious environment of economic stagnation and soaring costs. Faced with central banks in a dilemma and the ever-depreciating purchasing power of fiat currencies, gold, as the ultimate safe-haven asset with no counterparty risk, will have its inflation-hedging and sovereign credit-hedging attributes fully activated, becoming the ultimate refuge for investors and central banks around the world to hedge against systemic risks.