The Bond Market Issues World Leaders a Failing Grade

Bond investors have been increasingly concerned lately, as government deficits are out of control, inflation remains stubborn, and geopolitics threaten to exacerbate the situation. The G-20 summit brought together the officials who could address these issues, but their actions fell short of providing reassurance. U.S. Treasury yields hit a record high of 4.8%, the highest of President Trump's presidency, but the issue extends beyond the United States.

Japan and Europe have seen rising yields as well. France's 10-year yield is up 0.65 percentage points this year, while Britain's is up 0.67 points.

These countries are grappling with energy-induced inflation and massive debts, without the advantage of American tech-driven growth. France's minority government has struggled to pass a budget, and Japan's Prime Minister is using her substantial majority to increase spending rather than decreasing it. Despite this, eyes remain on the U.S., which leads the world with its largest and most important bond market, most influential central bank, and reserve currency.

The summit took place in Asheville, N.C., where Treasury Secretary Scott Bessent and other central bankers seemed indifferent to addressing the root causes of the problem.

Bessent stated that the world is drowning in debt, and the only way to escape is to grow our way out. However, this solution is unconvincing, as growth has not yet alleviated the issue. U.S. GDP grew by 2.1% in the past year, matching Joe Biden's last year in office. The federal deficit is projected to exceed 6% of GDP this fiscal year, on par with or above the previous full fiscal year.

Additionally, an AI boom is not sufficient to solve the problem. Economists have modeled scenarios in which AI could boost annual productivity growth by half to a full percentage point, but even in these cases, debt remains a significant burden.

Higher growth could lead to increased interest rates, further raising the interest burden on the debt. The bond market might eventually demand a fiscal risk premium to compensate for this. At future summits, G-20 leaders may find it increasingly difficult to ignore the bond market, as it becomes a more pressing concern.