Global bond rout deepens as 4 major economies face debt pressure

The global bond selloff has spread beyond US Treasurys, pushing borrowing costs higher across France, Italy, the UK and Japan as investors demand more compensation for holding the debt of heavily indebted governments.

"The market is repricing sovereign risk in a world where rates are structurally higher and fiscal buffers are thinner," said Olivier Blanchard, former chief economist at the International Monetary Fund, who has argued that debts can be sustained only while governments borrow below the pace of economic growth.

The 10-year Treasury yield fell to 4.63 percent from 4.70 percent late Monday, though it remains firmly above its 3.97 percent level from before the war with Iran sent oil prices and inflation worries higher. Brent crude lost $2.31 to $86.27 a barrel, while US crude dropped $2.06 to $80.30. On Wall Street, the S&P 500 rose 24.42 points to 7,677.28, the Dow Jones Industrial Average added 160.24 to 53,557.40, and the Nasdaq composite climbed 171.11 to 26,151.30. In Asia, Japan's Nikkei 225 rose 0.6 percent to 66,227.55, South Korea's Kospi jumped 1.6 percent to 6,849.92, and Hong Kong's Hang Seng gained 0.8 percent to 25,712.29. The dollar slipped to 159.02 yen from 159.20 yen, while the euro cost $1.1669, down from $1.1675.

The stakes are rising for the US, which crossed the $40 trillion debt milestone last week. The annual deficit sits near 6 percent of gross domestic product — double the 3 percent level economists generally consider manageable — while interest payments have doubled to about 3 percent of GDP.

Debt Dynamics Shift as Growth Lags Borrowing

From World War Two until the late 2010s, the US economy grew faster than federal debt, keeping borrowing contained relative to output. That relationship reversed after the 2007-2009 financial crisis and the COVID-19 pandemic, and the sweeping tax cuts pushed by President Donald Trump and passed by the Republican-controlled Congress in his first and second terms widened the deficits further.

About $8 trillion of the $40 trillion total is money the government owes itself, representing borrowing from trust funds including Social Security. The remaining $32 trillion owed to public creditors — individuals, foreign governments and the Federal Reserve — now amounts to roughly 100 percent of annual GDP. Japan has lived with far higher debt-to-GDP ratios, and the dollar's status as the world's main reserve currency gives the US certain advantages, but no one can know where the tipping point sits in terms of market perceptions of what is sustainable.

AI Supercharges Demand for Credit

Artificial intelligence is adding to the pressure. US hyperscalers have issued $220 billion of debt this year, competing with the federal government for the pool of global savings and helping sustain higher interest rates. Treasury Secretary Scott Bessent's sudden openness to active intervention to cap yields on long-term bonds reflects the administration's concern about the trajectory. "There's a lot of fear about AI. Those fears are based on the financing side, meaning that there is so much money that needs to be raised," said Eric Schiffer, who heads the Los Angeles-based Patriarch Organization. "What it's underrating, in my opinion, is the fact that this technology is so incredible."

Trump and Bessent have promised a costless fix through faster economic growth, but current estimates of the non-inflationary rate of growth sit around or slightly below 2 percent — well below what would be needed to curb the relative debt load even if the annual deficit were trimmed to 3 percent. AI might help boost productive capacity, but the timeline is uncertain, and the technology could undermine employment and income tax receipts even as it lifts stock prices and corporate profits.

The last time global bond markets repriced this aggressively was during the taper tantrum of 2013, when the 10-year Treasury yield jumped more than 100 basis points in a matter of months. This time the pressure is broader and more structural, hitting countries with large debt burdens hardest. If borrowing costs keep climbing, France, Italy, the UK and Japan face a fiscal squeeze that could force spending cuts or tax increases just as their populations age — a scenario that would ripple through global equities and currencies.

This article is for informational purposes only and does not constitute investment advice.