South Korea's KOSPI fell 3.3% on Wednesday morning, Tokyo's Nikkei 225 shed 2.7%, and China's CSI 300 slipped 1.4% — three numbers that tell a single story: the anxiety that gripped bond markets on Tuesday has crossed into equities and refuses to leave.

The sell-off follows a day in which UK long-term borrowing costs climbed to their highest point since early 1998, while Japan's ten-year bond yield reached a level not seen since 1996. Even before Asian markets opened, Wall Street had signalled the mood, with the Russell 2000 index of smaller US companies closing 1.2% lower. Three distinct pressures appear to be driving sovereign bond yields upward simultaneously.

Persistent inflation fears have made investors reluctant to hold long-dated government debt without demanding higher returns. Concerns about the scale of public spending in several major economies have compounded that reluctance. A third and less conventional factor has also been identified: artificial intelligence companies are borrowing heavily in capital markets, effectively competing with governments for the same pool of investor funds and pushing yields higher in the process. The consequences are not abstract.

In the United Kingdom, rising gilt yields directly threaten the fiscal headroom that the new chancellor was counting on ahead of the upcoming budget. Lord Jim O'Neill, the economist and former Treasury minister, warned on Tuesday evening that UK mortgage rates are likely to rise unless conditions in the bond market stabilise. He noted that ten-year gilt yields had moved by a quarter of a percentage point in a single session — a magnitude not recorded since the market turbulence that accompanied Liz Truss's brief premiership in 2022. Geopolitical risk has added further fuel to the fire.