U.S. 10-Year Yield Hits 5.36%, Highest Since 2002, Amid Global Debt Concerns

Public Debt at the Heart of IMF Concerns

A few days before the annual meetings of the IMF and the World Bank in Bangkok, Kristalina Georgieva presented a mixed picture of the global economy on Wednesday, October 7, in Singapore. While growth remains resilient, risks are accumulating. The IMF's managing director specifically highlighted three phenomena that could undermine this resilience: the burden of debt, the economic consequences of wars, and the effects of the rapid expansion of artificial intelligence. Public debt is one of her main concerns.

In many advanced and emerging economies, governments have limited fiscal maneuvering space. The rise in borrowing costs further complicates their situation, especially when they need to refinance maturing obligations. The United States, Japan, and Germany are among the countries mentioned in this assessment.

In the poorest economies, the debt burden can force governments to choose between repaying their creditors and funding essential expenditures. Conflicts in the Middle East and Ukraine are exacerbating these difficulties. Their impact on energy, trade, and prices heightens economic tensions, at a time when states have fewer means to mitigate shocks.

Artificial Intelligence: Growth Driver and New Source of Risks

Artificial intelligence holds a special place in the IMF's analysis. The massive investments in data centers and digital infrastructures currently support the activity and profits of many companies. However, this dynamic comes with imbalances.
The proliferation of infrastructures necessary for AI notably increases electricity needs, in an energy context already disrupted by conflicts. Energy tensions can then affect production costs, fertilizers, and food prices.

Moreover, the economic benefits of this investment wave remain unevenly distributed, with a strong concentration of AI-related activities in certain Asia-Pacific economies.
Kristalina Georgieva also voices concerns over the financial consequences of potential disappointment with the revenue generated by these investments. Large tech companies developing AI infrastructures are mobilizing considerable financing, while American equities hold a significant place in international investors' portfolios.

If the expected profits are slow to materialize, a correction in valuations could extend far beyond the tech sector.
The IMF does not present this scenario as an inevitable crisis. However, it underscores the need to support the development of artificial intelligence with training policies, appropriate regulation, and sufficient energy investments.

U.S. Bond Yields Reach 24-Year Highs

On the markets, concerns about public finances and inflation are leading to an increase in bond yields. On Wednesday, October 7, the yield on ten-year U.S. government bonds reached 5.36% during the session. We have to go back to 2002, after the bursting of the internet bubble, to find such a level.

This tension notably reflects expectations of U.S. monetary policy. Investors are anticipating further rate hikes from the Federal Reserve, as inflation remains above its target. The compensation required for holding long-term bonds can also increase when budgetary and inflationary uncertainties intensify.

For U.S. public finances, the stakes are high. The rise in yields doesn't immediately alter the cost of bonds already issued at fixed rates, but it gradually increases the cost of new financing and the refinancing of maturing securities. This can thus increase the interest burden and reduce the resources available for other expenditures. However, the U.S. ten-year yield eased after its peak on October 7. Data from the U.S. Treasury showed a benchmark rate of 5.28% for that day, underscoring the significant fluctuations observed during the session.

French Debt Remains Under Pressure

The tension is not limited to the United States. In France, the yield on the ten-year Treasury bond (OAT) was around 4.9% on October 7, reaching approximately 4.93% during the session. The yield spread with German bonds of the same maturity stood at 134.4 basis points, or 1.344 percentage points.

This spread, known as the OAT-Bund spread, measures the additional compensation investors demand for holding French debt instead of German debt. It had already surpassed 150 basis points a few days earlier, reaching levels not seen since the eurozone crisis.

This pressure comes at a delicate time for French public finances. The finance committee of the National Assembly is examining the first part of the 2027 budget bill from October 7 to 9. The debates are focusing on ways to restore public accounts, while bond markets remain attentive to the credibility of the budgetary trajectory.

Interest rate hikes add a challenge: the more expensive it is for France to borrow, the more it risks dedicating a significant portion of its resources to paying interest. The actual cost will, however, depend on the pace of debt renewal and the conditions under which future issuances are carried out.

Oil Over $100 Fuels Inflation Threat

Concerns over fiscal budgets are compounded by the rise in hydrocarbon prices. Brent crude was at $101.50 per barrel on October 7, up 0.9% at the time of the report published by Morgan Downey Commodity News.

The disruptions caused by the war in the Middle East and tensions in the Strait of Hormuz continue to strain supplies. To mitigate the consequences of this situation, the member countries of the International Energy Agency have decided to accelerate the delivery of the roughly 100 million barrels still available as part of the collective action initiated in March 2026.

This intervention aims to relieve the oil market, but it does not eliminate uncertainties over crude flows from the Gulf. Sustained high energy prices are likely to fuel tensions over transportation and production costs, and ultimately the prices paid by consumers.

For central banks, the situation is delicate. Inflation driven by energy prices can complicate monetary decisions, even as rising credit costs weigh on economic activity.

Fed Faces Persistently High Inflation

The latest official US data highlights this challenge. According to the Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index, closely monitored by the Federal Reserve, increased by 3.4% year-on-year in August 2026. Excluding food and energy, the rise reaches 3%. In both cases, inflation remains above the central bank's 2% target.

The minutes from the Fed meeting on September 15-16, released on October 7, show higher initial estimates of 3.8% and 3.4% respectively. These figures reflected the information available to monetary policymakers at the time, before the release of the official August statistics.

Despite price pressures, long-term inflation expectations remain more moderate. As of October 7, the gap between the nominal yield of ten-year US bonds and that of inflation-indexed securities of the same maturity was about 2.36 percentage points. This indicator, known as the break-even inflation rate, reflects the inflation compensation built into bond prices, even though it also incorporates risk and liquidity premiums.

Mary Daly, President of the San Francisco Fed, pointed out that energy tensions and investments related to artificial intelligence could make the fight against inflation more complex.

The Federal Reserve's upcoming decisions will therefore be closely watched. Investors will need to assess to what extent inflationary pressures justify maintaining restrictive monetary conditions or even a further tightening.

Increasingly Limited Room for Maneuver

Kristalina Georgieva's speech and the tensions observed in bond markets highlight a common difficulty: states are facing high financing needs in an environment where money is more expensive. Investments in artificial intelligence can support growth, but they also increase energy and capital needs. Geopolitical conflicts, on the other hand, maintain uncertainty over commodity prices. As for governments, they must preserve their ability to act without allowing their debt to increase indefinitely.
The annual meetings of the IMF and the World Bank in Bangkok will offer a new opportunity to clarify the proposed responses. In France, the examination of the 2027 budget will be another test, this time for the government's ability to present a public finance trajectory deemed credible by investors.