US$40 Trillion US Debt and AI Data Center Frenzy Push Global Long-End Rates Higher; ASX Sheds A$32 Billion in a Single Day

The yield on the US 10-year Treasury note touched 4.85% overnight at one point, its highest level since mid-2023. According to the Australian Broadcasting Corporation, the US Treasury recently expanded its long-term bond repurchase programme to US$6 billion, but the move failed to contain the upward momentum in long-end rates.

The selling pressure in the bond market is not unique to the United States. On the same night, the German 10-year Bund auction rate climbed to 3.39%, a 17-year high. In the Asia-Pacific region, Australia's ASX 200 closed down 1% at 8,819 points, evaporating approximately A$32 billion (around US$21 billion) in market value — its worst single-day performance in six months. Asia-Pacific equities were mixed, with Hong Kong's Hang Seng Index closing down 1.3%, South Korea's KOSPI edging lower, and Japan's Nikkei rebounding from morning losses to close higher.

Two forces driving yields higher are converging.

The first force comes from America's "fiscal incontinence". Westpac Chief Economist Luci Ellis said bluntly in comments published several weeks ago: "AI-related investment and US fiscal incontinence have together pushed the global interest rate structure higher, lifting its average above pre-pandemic levels." US government debt recently surpassed US$40 trillion. According to ABC News, Trump has reportedly proposed handing US$5,000 to every American adult, which, based on roughly 300 million adults, would imply potential total spending of up to US$1.5 trillion — roughly three-quarters of Australia's full-year economic output. Market traders, however, appeared not to take the proposal seriously; the 10-year US Treasury yield was essentially unchanged after his remarks.

The second force comes from the borrowing spree of "hyperscale" tech companies. Ellis noted that Alphabet, Amazon, Meta and Microsoft — once "cash cows" — have become among the largest issuers in the global corporate bond market. Citing Bloomberg data, ABC News reported that in the same week as the major debt issuance wave, Amazon issued £4.25 billion of bonds in the UK and Uber issued its first euro-denominated bond; on the previous day alone, US companies had raised €149 billion in Europe so far this year. Alphabet also issued A$5.5 billion of bonds in Australia last month.

"The scale of planned global data centre investment is staggering, generating enormous demand for debt financing," Ellis wrote.

Financial commentator and former banker Satyajit Das, in an interview with ABC News on Monday, quoted Shanaka Anslem Perera as saying: "Either a god is being built in the Texas desert — referring to AI data centres — or the most severe financial illusion in human history is playing out in real time before our eyes." Das himself acknowledged that the final answer may not become clear for another year or two.

Pressure from the bond market is being transmitted to global risk assets. Brent crude futures briefly broke through US$101 a barrel overnight. Citing Global X ETFs investment strategist Justin Lin, ABC News reported: "Oil prices are hammering the Australian market today. With Brent back above US$100, investors are being forced to confront the reality that inflation may remain elevated for longer, and the RBA may have more work to do." Lin warned that if oil prices push global inflation higher again and force central banks to tighten further, demand for industrial metals "could start to soften materially" — a "stagflation tail risk" that has been placed back on the table in 2026.

Central banks are being pushed along by the market. Citing Bloomberg data, ABC News reported that the probability of a Reserve Bank of Australia rate hike on September 29 has been priced at 75%, with the market also betting on a possible fifth hike by March 2027; the probability of a Federal Reserve hike on September 17 is 63%, rising to 92% for October; a European Central Bank hike on the evening of the 10th is viewed by the market as a near-certainty; and the probability of a Bank of Japan hike on September 18 is 97%. These bets may not all materialise, but they have already been enough to force a repricing across global equity and currency markets.

For ordinary households already grappling with sticky inflation, the jump in energy prices and the prospect of higher mortgage rates are precisely the combination the market "least wants to see".