Soaring bond yields, gaping deficits and towering debts: what could go wrong?
The rich world is flirting with fiscal disaster
Across the wealthy world, investors are demanding higher returns from governments. Bond yields have surged, reaching 5% on ten-year American Treasuries for the first time in years. The median yield on wealthy nations' ten-year government bonds has risen to almost 4%, the highest in over 15 years, more than five times its average in 2015-21. Borrowing costs are increasing as countries' debts have never been higher.
In America, the deficit is projected to be around 6% of GDP this year, nearly doubling compared to the early 2000s, while Britain's deficit has nearly tripled. France is expected to have a deficit of more than 5%. Politicians have dismissed past warnings of a debt crisis due to low interest rates, but now that rates are rising, countries must borrow more than twice the amount as a percentage of GDP to finance deficits and replace previously issued debt at lower rates.
Interest payments consume over 3% of GDP across the OECD and nearly 5% in America. As this debt matures, the bill will grow. If borrowing costs remain steady, America's annual interest payments could nearly triple to $2.7 trillion by the end of the decade, more than what it spends on Medicare or Social Security.
Yields on short-term government debt reflect investors' expectations of central bank rates and their concerns over inflation and the government's financial health. Long-dated bond holdings have declined even after central banks began cutting rates in 2024. The term premium, the extra return investors demand for lending long, has increased by more than one percentage point since 2020 and is now at its highest in over a decade.
The booming artificial intelligence infrastructure investment and the shift of previously reliable buyers to riskier assets are increasing the demand for higher compensation. Governments are borrowing less and issuing debt with shorter maturities to avoid the term premium, relying more on bills that mature within a year. This change in borrowing strategy is likely to increase the cost of future debt issuance.
Written by urgent.news from Hindustan Times - World News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
