As U.S. homebuyers monitor the climb in mortgage rates, Jay Hatfield, CEO at Infrastructure Capital Management, notes that while many point to hyperscale spending and the federal budget deficit, these factors were present long before the current volatility.
Bond prices and yields share an inverse relationship. When bonds are sold off in large volumes and prices drop, yields climb. inflation fears, causing investors to sell off bonds at a rate not seen in years.
Consequently, bond yields have spiked, with France’s 10-year yield reaching its highest point since 2002. Similar historic sell-offs have occurred in the U.K. and Italy. Because global financial markets are deeply interconnected, this European instability has quickly impacted the U.S.
However, geopolitical tensions and high oil prices are not the only factors at play: ballooning government debt and rising deficits are acting as the primary drivers behind this worldwide sell-off.
The role of government debt and deficits
Major global powers are currently managing massive fiscal deficits that are inflating their national debts. The U.S. national debt has surpassed $40 trillion, while several European nations are seeing debt-to-GDP ratios at or above 100%.
As governments continue to run significant deficits, they are compelled to issue new bonds. When the supply of bonds exceeds natural market demand, prices decline and yields rise to attract buyers. In some instances, this creates a feedback loop where higher interest rates increase the cost of servicing debt, forcing even more bond issuances.
France serves as a prime example, where a lack of currency sovereignty, stagnant economic growth, and political gridlock create long-term risks for a sovereign debt crisis, according to analysts.
France’s public debt is approaching 120% of GDP, and its budget deficit remains among the largest in Europe. Following the 2024 snap election, the French Parliament has remained deeply divided and unable to pass significant spending cuts.
Investors are doubtful that the upcoming presidential election will result in the necessary tax increases or spending reductions, fueling concerns about a <a It's extremely unlikely in the U.S. because the economic growth is strong and the debt-to-GDP is stable," he notes. "Europe is way worse. France has the highest yields in the Eurozone. France is unhinged, and I would watch that."
Hatfield remains optimistic that, unlike the Eurozone, the U.S. has the capacity to “grow out of our problem,” even though he does not expect the federal government to reach a balanced budget in the near future.
AI spending also a factor
There are also questions regarding how the massive investment in artificial intelligence might influence domestic and global bond markets.
Tech giants and hyperscalers like Meta, Alphabet, and Amazon have been issuing corporate debt to finance the construction of new data centers.
This effectively forces investors with limited capital to choose between U.S. Treasuries and these high-grade corporate bonds, pressuring the government to raise yields to remain competitive and attract investors.
However, Hatfield downplays the influence of AI capital expenditures on interest rates, pointing out that the AI boom was already underway before the conflict with Iran began in February.
“Everybody wants to blame AI for every problem in the world,” he says.
What the future holds
Krimmel argues that consumers should prepare for the reality of elevated 10-year yields.
“There are structural factors already pushing yields up, including expectations about growth and future spending in an AI-driven economy, a higher neutral interest rate as a result, and increased competition for capital,” he says.
Furthermore, the market must navigate other inflationary pressures, such as recurring global supply shocks and a more fragile domestic fiscal environment.
Hatfield is even more direct on this issue, predicting a recession for the U.S. residential real estate sector.
“We’re already in a housing recession, and we expect it to get significantly worse,” he argues.
Analysts and traders suggest that the current bond market instability could intensify before it improves, which may result in higher mortgage rates for the foreseeable future.
