Global bond yields hit decade highs as debt tops $350 trillion

Global bond yields in France, Italy, the U.K. and Japan have climbed to their highest levels in more than a decade as the Iran war reignites inflation fears and investors test the fiscal limits of heavily indebted governments.

The selloff in U.S. Treasurys has captured global attention, but overseas bond markets are getting hit harder. France's 10-year yield has risen about half a percentage point since the end of June, Italy's nearly as much, while the U.S. 10-year Treasury yield is up roughly 0.2 percentage point over the same stretch.

"People are testing the waters of what the U.S. should pay to borrow, but then they look to other countries like France and there are all these fragilities," said Ludovic Subran, chief investment officer at German insurer Allianz. "Everybody is testing which countries will yield first to bond vigilantes' pressure."

Global debt has surpassed $350 trillion, or about 305 percent of global GDP, according to the Institute of International Finance. Governments in advanced economies alone are expected to borrow $18 trillion this year, per the OECD, competing for buyers with stocks and bonds issued by U.S. technology companies. Germany's 10-year Bund yield has hit its highest level since 2011, while Japan's 10-year JGB yield reached a three-decade high.

The rout carries direct consequences for fiscal policy. France now pays about 0.85 percentage point more than Germany to issue a 10-year bond, near its widest in years, while Japan's debt-servicing costs are expected to reach roughly $230 billion next fiscal year, up 17 percent. With the ECB pricing in about one-and-a-half rate hikes this year and the Bank of Japan expected to move by October, borrowing costs across major economies are set to keep climbing.

Inflation Fears Make a Comeback

Natural-gas prices in Europe have risen to their highest level in more than three years as European and Asian buyers compete for constrained Middle East supplies ahead of winter. The supply crunch has revived memories of 2022, when Europe scrambled for gas after Russia cut off supply following its invasion of Ukraine, according to Tomasz Wieladek, chief European macro strategist at T. Rowe Price. "The market has some muscle memory," he said. "Last time around, the gas price was the key canary in the coal mine for higher inflation." Brent crude has climbed to $91.41 a barrel, and investors now price about one-and-a-half rate increases from the ECB this year, up from one earlier in August.

France's Fiscal Woes

France has been in the eye of the storm. President Emmanuel Macron's government has struggled for years to rein in spending, with the budget deficit expected to remain at about 5 percent of GDP this year. New polling has cemented populist leader Marine Le Pen's front-runner status for next year's election, and investors question whether she will commit to curbing spending. France now pays more to borrow than almost any other major European country, including Greece and Italy. Guilhem Savry, head of equity and fixed-income strategy at Edmond de Rothschild, expects the premium over Germany to top a full percentage point as the election nears. "France's debt is not sustainable in the long term, and the market is starting to understand," he said. "The future is very dark for France."

Japan's Inflation Problem

Japan's bond yields have surged this year as a decades-long stretch of deflation recedes. Headline inflation is approaching 2 percent, but the Bank of Japan has raised rates just once this year, to 1 percent, and its reluctance has pressured the yen, prompting a rare U.S.-Japan joint intervention to prop up the currency. Markets now price a rate increase by October. Japan has been whittling down its debt load, which stands at about 200 percent of GDP, and runs one of the smallest budget deficits among major economies. But interest payments are mounting as borrowing costs climb, with debt-servicing expected to cost roughly $230 billion next fiscal year, up 17 percent.

U.K.'s Budget Worries

The U.K. bond market has been particularly sensitive to global frictions since 2022, when then-Prime Minister Liz Truss shocked investors with a plan for unfunded tax cuts. Her successors have tried to rebuild trust by sticking to strict budgeting rules, but investors remain anxious about the debt path, and pension funds that once vacuumed up long-term government bonds are shifting into other investments. Rising yields are making new Prime Minister Andy Burnham's plans for reviving home-building and investment harder to achieve. The recent rise in borrowing costs will cost the U.K. about $10 billion, according to Société Générale, limiting his room for new spending ahead of his first budget this fall.

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