Several factors have driven the global rise in sovereign yields this year, with momentum accelerating over the past month. Persistent inflation has been a key driver, largely due to the surge in oil prices as the U.S. and Iran have failed to reach an agreement. This has led central banks around the world to raise rates and adopt a more hawkish stance. Strong economic growth has also given monetary authorities more room to act. Finally, as public deficits continue to balloon, investors are demanding higher yields to compensate for rising risk. France is the clearest example, but most countries are now feeling the effects of their own fiscal spending excesses. Let’s examine each of these factors and consider what growth may look like going forward.
Inflation has reaccelerated across the globe, with the eurozone experiencing the most pronounced increase among major economies. From a low of 1.7% in January, annual inflation climbed to a three-year high of 3.8% in September, surpassing consensus estimates. In the U.S., the increase has been less dramatic, but the latest reading still showed an annual increase in prices of 3.4%. The main factor has been the war between the U.S. and Iran, which has lasted much longer than initially expected, raising the risk of more persistent inflation as higher energy prices continue to feed through the economy.
Central banks had little choice but to raise interest rates last quarter and adopt a more hawkish stance. With inflation still far above their 2% target, no clear end to the war in sight and the policy mistake of 2022 still fresh in their minds (when they assumed the post-pandemic surge in inflation would be transitory and were slow to act), policymakers felt forced to respond. The problem is that inflation is being driven by a supply shock rather than a demand shock, and raising rates will not make oil flow more easily through the Strait of Hormuz.
Consumers are clearly feeling the strain from higher energy prices, yet the broader data still points to a resilient economic environment as growth is being supported by several structural drivers. One of the most important is the rapid expansion of investment linked to artificial intelligence, which is boosting demand for chips, digital infrastructure and data centres. At the same time, the need to modernize and expand power infrastructure is creating significant activity in the energy sector, especially as electricity demand rises from data centres. Another key factor is increased government spending on aerospace and defence, as national security concerns remain elevated in conjunction with large-scale public infrastructure programs.
For now, these structural drivers appear largely insulated from the effects of inflation and higher interest rates. However, the key question is whether a prolonged period of elevated rates could eventually take its toll. AI investment, which is increasingly debt-funded and therefore more sensitive to the cost of capital, could slow if borrowing costs remain high. Likewise, governments may be forced to scale back spending programmes. Although these growth drivers are vital to national sovereignty, striking the right balance may prove difficult if interest rates continue to rise.
Date of report: October 9th of 2026