Global bonds edged higher on Wednesday but remained on course for their worst month in years as deteriorating government finances, heavy debt issuance and persistent inflation pushed borrowing costs higher, while the seven-month-old US-Israeli war with Iran continued to keep energy prices elevated.

The bond selloff has become one of the most striking developments across global financial markets this quarter. Sovereign yields influence valuations across asset classes, providing the benchmark against which investors price equities, corporate debt, mortgages and other forms of borrowing. Their rapid rise is therefore tightening financial conditions even as stock markets continue to show surprising resilience.

The benchmark 10-year US Treasury yield was 5.209% in early European trading, down 4.6 basis points on the day but still close to its highest level since June 2007. The yield was on track to rise by more than 45 basis points in September, its biggest monthly increase in about two years.

The two-year Treasury yield fell 1.9 basis points to 4.870% after New York Federal Reserve President John Williams pushed back against expectations of an earlier tightening in monetary policy. Even after Wednesday’s decline, the two-year yield was more than 50 basis points higher for the month.

“We have reached yield levels that are becoming genuinely significant,” said Carlo Franchini, head of institutional clients at Milan-based Banca Ifigest. “The temptation to move out of equities could become an issue.”

Franchini said he was not yet taking profits on stocks, however, arguing that equities could remain supported through October if easing tensions around the Strait of Hormuz lead to lower oil prices and relieve some of the pressure on bond yields.

“In my view it is better to stay long,” he said.

Bond Stress Spreads Across Major Markets

The pressure is not confined to the US Treasury market. German and French 10-year government bond yields reached 17-year and 18-year highs this week. German yields were heading for an increase of about 70 basis points for the quarter, while French yields were on track for a roughly 120-basis-point rise.

Japan has experienced a similar move. Its 10-year government bond yield remained near multi-decade highs and was headed for a 38-basis-point increase this quarter.

The synchronized rise in borrowing costs is notable because it reflects more than changing expectations for central-bank policy. Governments are issuing large amounts of debt at a time when investors are demanding greater compensation for holding longer-dated bonds, while higher energy prices are adding another source of inflationary pressure.

The result is a more difficult environment for policymakers. Higher inflation can keep interest rates elevated, while rising debt-servicing costs can make government finances more vulnerable to higher yields.

That dynamic is increasingly visible in markets. The US 10-year yield has moved above 5%, while long-term borrowing costs in Europe and Japan have also risen sharply. The scale of the moves means the bond market is becoming a larger potential constraint on equity valuations and corporate investment.

Yet equity markets have so far largely resisted the pressure.

Stocks Remain Resilient Despite Higher Borrowing Costs

European shares were higher on Wednesday, with the STOXX 600 rising 0.6% by 0812 GMT. The index was still heading for a 1.4% monthly decline but was broadly unchanged for the quarter.

MSCI’s broadest index of Asia-Pacific shares excluding Japan gained 0.3% and remained on course for a 1.1% monthly decline.

Japan’s Nikkei jumped 1.9%, putting it on track for a 0.6% monthly gain, although the index was still set for a 4.7% quarterly decline. South Korea’s Kospi was headed for a 0.3% monthly gain but a 19% quarterly plunge.

US equity futures also pointed to a firmer opening, with Nasdaq futures up 0.2% and S&P 500 futures nearly 0.3% higher.

The resilience makes a difference because higher bond yields normally put pressure on equity valuations by increasing the discount rate applied to future corporate earnings. The effect is significant for technology companies, whose valuations often depend heavily on profits expected further into the future.

“What was surprising to us was the sanguine reaction of the equity market where the growth in nominal GDP was driving earnings optimism,” said Mohammed Apabhai, Citi’s head of Asia-Pacific trading strategy.

“US equity markets are reacting to the rise in bond yields but only outside of the tech space.”

That helps explain why the equity market has remained relatively calm. Strong earnings expectations and continued enthusiasm for artificial intelligence have provided support, while investors appear to be treating the increase in yields partly as a reflection of stronger nominal economic activity rather than an immediate threat to corporate profits.

But that resilience could become harder to maintain if yields remain elevated.

In China, the picture is considerably weaker. The blue-chip CSI 300 rose 0.3% but remained close to a one-year low reached earlier in the week. The index was heading for a 12% quarterly decline, its largest since the height of China’s Covid-19 lockdowns.

Dollar and Oil Reflect The New Macro Pressure

The rise in US yields has also strengthened the dollar. The currency was on course for a monthly gain of roughly 2%, although it slipped 0.1% on Wednesday.

The euro traded just above a 16-month low at $1.1346 and was heading for a 2.3% monthly decline as Europe’s economy faced the combined pressure of higher energy costs and growing political uncertainty.

Sterling rose 0.2% to $1.326 but was set for a 2.1% monthly decline.

The yen moved in the opposite direction, gaining 0.2% to 156.95 per dollar and heading for a 1.7% monthly increase. Investors remain cautious about pushing the currency substantially weaker amid the possibility of coordinated intervention by Tokyo and Washington.

Energy markets remain central to the bond-market story.

US crude was unchanged at $89.41 a barrel, while Brent slipped 0.1% to $102.47. Both benchmarks remained on course for monthly gains as the conflict continued to raise concerns about prolonged supply disruptions.

Those prices are feeding directly into the inflation problem confronting bond investors. If oil remains above $100 for an extended period, central banks could face greater difficulty easing monetary policy even as economic activity slows.

Gold, meanwhile, rose 0.44% to $4,199.28 an ounce, retaining some of its appeal as investors navigate inflation, geopolitical risk and concerns over government finances.

The central tension across markets is becoming clearer: equities are still being supported by earnings, economic growth and the AI investment cycle, while bonds are increasingly demanding a higher price for the risks associated with inflation, debt and fiscal deterioration.

For now, stocks are absorbing the increase in yields. But with the US 10-year yield near 5.2% and borrowing costs rising across Europe and Japan, the bond market is setting a much higher hurdle for the risk assets that have benefited from years of relatively cheap capital.

Elon Musk says artificial intelligence could eventually usher in an “age of abundance” in which robots and superintelligent AI dramatically increase access to income, goods and healthcare, although he expects the nature of employment to change significantly.

Speaking to reporters after a meeting of technology executives at the White House on Tuesday, the Tesla and SpaceX CEO said the most likely outcome of advancing AI would be a future in which traditional concepts of income and employment are transformed.

“I think by far the most likely outcome is an age of abundance where we don’t have just universal basic income, we have universal high income,” Musk said.

He said that combining advanced AI with robotics could also dramatically improve healthcare.

“When you have robots, and you have superintelligence, it means that everyone in the world can have better medical care than anyone here, including me,” Musk said, describing that possibility as “wonderful.”

Musk’s comments add to a growing debate among technology executives about how rapidly advancing AI could reshape work and the distribution of wealth.

Asked whether AI could destroy jobs, Musk said employment would change, comparing the transition to earlier technological shifts.

“Jobs are going to change,” he said. “Being a computer used to be a job.”

He noted that digital computers now perform calculations that once required people to do them manually, adding that he doubted “anyone is pining to go back and do calculations all day.”

Musk also pointed to the current labor market, saying that AI has not yet produced a major increase in unemployment and that there remains “tremendous demand for people.” He said he expects AI to produce an “incredibly beneficial” outcome for humanity and described the potential result as a “future you would want.”

The prediction rests on the assumption that more capable AI systems and robots will substantially increase productivity and reduce the cost of producing goods and services.

Musk has previously described a future in which technological advances could make production so inexpensive that people would have access to virtually unlimited goods and services. He has also suggested that government-issued payments could help address unemployment resulting from AI.

“Universal HIGH INCOME via checks issued by the Federal government is the best way to deal with unemployment caused by AI,” Musk wrote on X in April.

That concept goes beyond conventional universal basic income, which generally refers to providing people with a regular payment regardless of employment status. Musk is envisioning a much larger redistribution mechanism in which rising productivity from AI and robotics generates sufficient wealth to provide people with substantially higher incomes.

AI Safety Remains Part of The Transition

Musk’s optimistic assessment came as he joined other major technology executives in committing to additional safeguards around frontier AI systems.

Musk, Nvidia CEO Jensen Huang, Meta CEO Mark Zuckerberg, Alphabet CEO Sundar Pichai, OpenAI’s Greg Brockman and Anthropic CEO Dario Amodei signed a “Joint Commitment on Frontier Responsibilities.”

The companies agreed to develop powerful AI systems safely and responsibly and pledged to establish “robust internal controls.” Those controls are to be overseen by a dedicated internal team, an independent external auditor or evaluator, and an independent board committee.

The commitments come amid renewed concerns about the risks associated with autonomous AI systems. Musk has previously taken a more cautious position on the technology’s long-term consequences. He has said the possibility of AI and robots going catastrophically wrong is “not zero” and has described the transition toward an AI-driven economy as potentially “bumpy.”

He has also raised a less economic but potentially significant consequence of widespread automation: the loss of purpose if machines eventually perform much of the work that gives people’s lives structure and meaning.

That issue matters more under Musk’s vision of universal high income. If employment becomes less necessary because AI and robots can produce most goods and services, the economic problem of unemployment could become a social and psychological question about what people choose to do with their time.

Musk has even stated that traditional retirement planning could become less important if his expectations about technological abundance materialize. He has said that people’s savings for retirement could eventually become “irrelevant” if future productivity makes goods and services extremely cheap.

However, those outcomes remain projections rather than established economic trends for now. Musk’s argument depends on continued advances in AI, robotics and automation, alongside a mechanism for distributing the resulting economic gains broadly enough to produce the “universal high income” he anticipates.

The near-term question is more conventionally about these concerns: how quickly AI changes existing occupations, which new jobs emerge, and how businesses, governments and workers adapt.