Summary of Key Points
Recently, the interest rates on long-term U.S. government bonds (such as 30-year bonds) have soared to their highest levels since 2007, acting like a “bomb” that has triggered a global market crisis: stock markets in Asia and the Pacific have tumbled (South Korea even experienced a circuit breaker, while China’s ChiNext index fell by more than 6%); borrowing costs in Europe have also reached multi-year highs, affecting stocks, currencies, and commodities. The underlying reasons include a severe imbalance between supply and demand for U.S. bonds (the United States is issuing too much debt, while overseas buyers are reducing their holdings), coupled with high fiscal deficits and inflation risks. The pricing logic for U.S. bonds has changed; it’s no longer just about the Federal Reserve’s interest rate hikes but also about debt risk and supply-demand dynamics. Asset allocation is shifting—once-popular AI technology stocks have been hit, while gold and commodities have become new favorites. In the short term, the market’s direction will depend on U.S. bond auctions and the minutes from the Federal Reserve meetings.
Why Are U.S. Bond Interest Rates So High? Both Supply and Demand Are Out of Control
Simply put, there is too much supply and too little demand for U.S. bonds, which is driving up interest rates.
- Supply Side: The United States is like a “money printer” that can’t stop. Its debt is approaching $40 trillion, and this year alone it has spent nearly $1.2 trillion on interest (more than the GDP of many countries). The deficit in the first 10 months of fiscal year 2026 alone was $1.8 trillion. Moreover, the U.S. continues to issue new bonds; in August, the issuance of investment-grade bonds reached $145.2 billion, with AI companies further driving up interest rates as more borrowers enter the market.
- Demand Side: Major overseas buyers (such as Japan, China, and the UK) are reducing their holdings of U.S. bonds. Japan’s holdings decreased by $26.4 billion in June, China’s by $633.4 billion (the lowest since 2008), and the UK’s by $8.7 billion. With no buyers, the U.S. has to raise interest rates to attract investors.
Global Markets Are Suffering: Stocks, Currencies, and Commodities All Decline
U.S. bonds serve as a “pricing anchor” for global assets; when their interest rates rise, all other assets have to be re-evaluated:
- Asia-Pacific Stock Markets on Black Wednesday: The South Korean Composite Index fell by 5.8% (with a nearly 7% drop triggering a circuit breaker), the Nikkei fell by 3.16%, and China’s Shanghai Composite Index fell by 2.4% (breaking below 3,900 points). AI, semiconductors, and optical communications sectors were hit hardest because they rely heavily on borrowing for development, and higher interest rates increased their costs.
- European Borrowing Costs Soar: France’s borrowing costs are at their highest since 2008, Germany’s are near 2011 levels, and the UK is close to 6%—this makes it more expensive for businesses and governments to borrow, increasing economic pressure.
- Other Assets Are Also Affected: Currency markets are volatile, and commodity prices have fallen in the short term as global capital seeks to adjust.
The New Logic for U.S. Bond Pricing: It’s Not Just About the Fed’s Interest Rate Hikes
In the past, people focused on whether the Federal Reserve would raise interest rates (policy rates). Now it’s different:
- New Focus: Risk Compensation
Buyers of U.S. bonds are concerned about high risks (such as excessive U.S. debt and potential inflation), so they demand higher “risk compensation” in the form of higher interest rates for longer-term bonds. According to Guolian Minsheng Securities, the pricing of U.S. bonds is now determined by fiscal risk, supply-demand imbalances, inflation, and policy uncertainties, rather than just the Fed’s actions.
Asset Allocation Is Changing: Gold and Commodities Are Becoming Favorites
With rising interest rates, which assets can withstand the impact? Institutions generally favor these two:
- Gold: It fell in the short term but has long-term support. Although it dropped by $82 due to higher real interest rates (nominal interest rates minus inflation), central banks around the world are still buying gold as a safe-haven asset. The U.S. debt issue also raises concerns about the depreciation of the dollar, making gold a valuable asset.
- Commodities: Both supply and demand factors are favorable. The dollar may weaken in the long term, making non-dollar assets more attractive. Additionally, supply-side issues (such as El Niño affecting agricultural production and geopolitical conflicts in the Middle East boosting energy prices) and the growth of AI and electric vehicles (which require more industrial metals like copper) are driving up commodity prices.
- Technology Stocks: They have experienced short-term volatility but have potential for long-term recovery. The AI sector is currently under pressure due to rising interest rates, but institutions believe the fundamentals remain strong (demand for computing power continues to grow), suggesting a possible rebound in the medium to long term.
Short-Term Key Events: U.S. Bond Auctions and Fed Meeting Minutes
The market’s future direction will depend on two major events:
- August 20th 20-Year Bond Auction: Previous auctions of long-term bonds have set new record interest rates. If no one buys these bonds, interest rates may continue to rise, causing further market turmoil.
- July Fed Meeting Minutes: These minutes will reveal the committee members’ views on inflation and interest rate hikes. If most members expect more hikes, interest rates are likely to rise; if some suggest cuts, the market might breathe a sigh of relief.
In summary, the surge in U.S. bond interest rates is part of a chain reaction that affects global markets, but it also points to new investment directions: don’t focus solely on technology stocks; consider gold and commodities as well.