In October, France’s newly appointed prime minister Michel Barnier warned of a “sword of Damocles” hanging over the nation — its “colossal” debt.
His try to deal with the nation’s creaking funds with a €60bn package of tax rises and spending cuts led to the tip of his premiership simply two months later. A downgrade of France’s credit standing by Moody’s followed, with the company forecasting an increase within the debt-to-GDP degree from 113 per cent in 2024 to 120 per cent by 2027.
The chance for France, Moody’s warned, was the consequences of a “destructive suggestions loop between increased deficits, the next debt load and better financing prices”.
It’s a state of affairs more and more fretted over by policymakers throughout the developed world, as they watch debt ranges attain or exceed 100 per cent of GDP.
Veteran macro investor Ray Dalio has urged nationwide governments to keep away from a “debt demise spiral”, the place their fast-rising money owed get uncontrolled as they try to boost extra money to cowl surging curiosity funds, in flip driving these borrowing prices increased nonetheless.
The OECD just lately estimated that its 38 members had been expected to borrow a file $17tn in 2025, up from $16tn final yr.
“International debt markets face a tough outlook,” the organisation warned in its annual debt report in March.
Nonetheless, analysts don’t imagine a sovereign debt sustainability disaster amongst developed nations is probably going within the close to time period, barring a giant coverage error.
Worries over ranges of presidency borrowing have been round for years, and bond markets have continued to soak up file issuance. Buyers level to the facility of central banks to arrest any speedy rise in bond yields by way of emergency asset-purchasing programmes.
However a gentle ratchet increased in bond yields because the begin of the last decade — partly attributable to central banks promoting down these disaster holdings — has turned up the temperature. There’s additionally unease about governments’ persevering with reliance on fiscal stimulus to attempt to gas financial progress.
“Governments world wide have gotten used to operating these enormous deficits. Everybody has been asking themselves, how excessive can these deficits go and what’s the endgame?” says a senior dealer in authorities bonds.
Yields on 30-year US Treasuries topped 5 per cent final month to achieve their highest since late 2023, as buyers dumped the debt in a sell-off pushed by President Donald Trump’s commerce conflict and exacerbated, fund managers say, by fiscal issues. UK borrowing prices of the identical maturity reached their highest since 1998.
The rising price of debt is already affecting governments’ priorities. Barnier’s successor François Bayrou warned final month France could be “heading to a disaster” with out spending cuts and highlighted the chance from rising borrowing prices.
Curiosity funds gobbled up 3.3 per cent of GDP throughout the OECD group of nations final yr, the most important share since at the least 2007.
“Public money owed proceed to extend with no limits in sight,” says Koen De Leus, chief economist at BNP Paribas’s Belgian arm. He argues {that a} “snowball impact is slowly forming” in international locations such because the UK and Italy, the place common rates of interest on debt are starting to outstrip progress charges.
If international locations don’t at that time stability their budgets, “or higher even realise a main funds surplus, your [debt-to-GDP ratio] will get uncontrolled,” De Leus provides. The US can be “coming into the hazard zone” on an identical evaluation, he says.
If the road the place enormous money owed tip right into a debt disaster is inconceivable to attract, turbulence in bond markets in latest months has supported the argument that it’s getting nearer, with buyers usually highlighting the UK, France and even the US as below stress.
Throughout France’s political disaster on the finish of final yr, the extra rate of interest on its debt relative to Germany’s benchmark Bunds reached its highest degree since 2012, as buyers feared for the near-term financial outlook.
Within the UK, the federal government warned of future tax rises even after it had unveiled a £14bn plan to enhance the general public funds, as rising yields erased the brand new chancellor’s wriggle room towards her self-imposed fiscal guidelines.
However the largest fear is the near-$30tn Treasuries market, which not solely funds US authorities spending but in addition supplies the bedrock protected asset of the worldwide monetary system.
Past the latest sharp unload triggered by Trump launching his commerce conflict, the dimensions of the funds deficit, at greater than 6 per cent of GDP, is a key concern highlighted by fund managers, together with the potential for it to deteriorate additional by way of the president’s tax-cutting agenda.
The Financial institution of England dropped a sale of long-dated bonds within the latest turmoil, underlining the risk to broader markets.
Some commentators argue that these episodes are linked, reflecting that the bond market has moved into a brand new interval of antagonism, the place buyers are placing stress on governments to enhance their funds. This can be a policing function it has performed in instances previous.
“The bond vigilantes have come again following years of hibernation,” says BNP’s De Leus.
Even Germany, a traditionally reluctant borrower, is popping on the fiscal faucets, main a European cost to extend defence spending.
Many argue {that a} transfer increased in yields might be defined by regular inflationary pressures and doomsaying over debt is overdone.
“Everyone seems to be at all times worrying about authorities bond provide,” says Nick Hayes, a fund supervisor at Axa’s funding administration arm. He argues provide is comparatively simple to forecast, with international locations telegraphing their borrowing plans, whereas demand is “close to inconceivable” to foretell. “So due to this fact folks ‘chubby’ the fear about provide and ‘underweight’ an assumption on demand,” he provides.
Massive economies might avert issues if they’ll handle to stoke increased progress, or be compelled to dwell with the next degree of inflation than they’d have endured in any other case to “inflate away” a few of their debt.
All-important US Treasury yields, regardless of the latest sell-off, stay under ranges seen two years in the past. Many buyers view the present degree of yields as a vastly engaging entry level.
Pete Drewienkiewicz, chief funding officer at consultancy Redington, argues long-dated gilts provide a pretty yield towards friends and will outperform, given the UK’s “decided give attention to fiscal accountability”.
One space the place there’s broad settlement is that yield curves will stay steep in an atmosphere of better debt provide. The additional rate of interest paid on 30-year US debt versus 2-year debt has reached its highest in three years, and longer for the UK.
Some bondholders anticipate governments to challenge a better proportion of short-term debt, to insulate themselves from increased long-term yields. The UK has stated it might accomplish that this yr.
Robert Dishner, senior portfolio supervisor at Neuberger Berman, argues that governments rolling their debt over extra ceaselessly would face “costs being decided on how nicely they’re doing fiscal consolidation”, be that much less spending, increased taxes or higher progress.
He provides: “Greater than a sovereign debt meltdown, markets are prone to maintain governments on shorter leashes.”
