Global sovereign bond yields climbed in tandem with US Treasury yields on Tuesday, as diplomatic efforts between Washington and Tehran failed to produce a breakthrough, reigniting concerns over rising oil prices and sustained inflationary pressures. One economist pointed to the AI investment boom as an additional factor driving up borrowing costs across global markets.

A wave of selling swept through global sovereign debt on Tuesday, pushing borrowing costs to multi-decade highs as hopes for a swift resolution to the Middle East conflict quickly evaporated. The window for negotiations on a new US-Iran agreement has closed without any progress, stoking fresh worries about inflation. On Monday, US President Donald Trump explicitly refused to extend the US-Iran ceasefire, while Iran issued new threats of military escalation, with both sides rejecting further peace talks. A cargo vessel came under attack from projectiles while transiting the Strait of Hormuz, a critical shipping lane for global trade and the central flashpoint in the dispute.

The conflict, now nearly six months old, has effectively shut down the strait, driving up prices for energy and other key commodities. Oil prices extended their gains on Tuesday, with international benchmark Brent crude futures holding above $90 per barrel. The US 30-year Treasury yield rose nearly 3 basis points to 5.335%, its highest level since 2002. The 20-year Treasury yield hit a post-2006 peak, while the benchmark 10-year Treasury yield stood at 4.748%, the highest since 2007.

Background note: Bond yields move inversely to prices, and one basis point equals 0.01%.

Government bonds outside the US also came under selling pressure, with several markets touching or nearing multi-decade highs. Germany's benchmark 10-year yield reached a 15-year peak, France's 10-year yield climbed to its highest since 2008, and Japan's 10-year yield rose to 2.941%, surpassing the 30-year high set earlier this spring. Sovereign bonds in the UK, Italy, Switzerland, and Canada also saw yields spike sharply across various maturities.

Dan Coatsworth, market director at AJ Bell, noted in a Tuesday morning research note that the failure of Middle East mediation efforts has put inflation worries and potential rate hike expectations at the forefront of investor attention. He added, however, that "the rise in long-term bond yields is not solely driven by rate hike expectations and inflation fears. It also reflects growing concerns about massive government borrowing, with investors demanding higher compensation to hold long-term sovereign debt."

Jim Reid at Deutsche Bank said in a research note that the bond market sell-off over the past 24 hours was not triggered by a single event, "but with no sign of any agreement between the US and Iran, investors are starting to price in a longer closure of the Strait of Hormuz." He added, "Investors are again pricing in scenarios of sustained high oil prices. As concerns grow over a prolonged blockade of the strait, fixed income markets are under pressure, with long-term sovereign bonds hit particularly hard."

The AI investment boom factor: Carl Weinberg, founder of High Frequency Economics, appeared on CNBC's "Squawk Box Europe" on Tuesday and argued that massive capital spending in the AI sector is also fueling the bond market sell-off. "AI infrastructure construction, technology R&D investment, utility support, and more all require large-scale debt financing," he said. He estimated that related borrowing has reached as much as $600 billion over the past year, with an additional $200 billion in financing, credit, new bond issuance, and IPO projects already in the pipeline.

"This money comes from the same pool of savings that funds government deficit financing and other corporate investment," Weinberg explained. "In the traditional view, governments are the highest-priority borrowers: they borrow what they need first, at any cost, and whatever remains goes to smaller businesses."

But Weinberg said the collective rise of the AI industry has created another super-sized source of demand for capital. "The overall scale of borrowing in the AI sector is enormous. I believe the AI industry, combined with government debt, is crowding out investment in small and medium-sized enterprises, and that is what is driving bond yields higher," he told the program. "This phenomenon is not confined to the US; capital from around the world is flowing into the US to fund AI projects. This is causing a drain on savings at the balance-of-payments level in other countries, which in turn pushes up their bond yields."