Bond yields rise 50 basis points as global debt nears 100 trillion dollars
Yields have surged 40 to 50 basis points since late June. This marks a shift in bond markets driven by structural economic changes.
Bond yields have climbed by 40 to 50 basis points across all segments of the curve since the end of June. This sharp increase marks a new phase in the bond market shift that began in 2022. The move reflects structural transformations in the global economy. It poses a new source of concern if the trend intensifies. Global public debt is approaching the psychological threshold of 100 trillion dollars.
The United States debt now exceeds 40 trillion dollars. This brings the nation close to the limits set by Ferguson’s Law. This law states that a great power risks losing its status when interest payments exceed defense spending. At that point, servicing past debts requires more resources than ensuring future security. The rising costs are a direct result of the shifting interest rate environment.
Funding needs drive rate normalization
The natural rate of interest balances savings and investment. Since the pandemic, funding needs have increased significantly. These needs are associated with defense, artificial intelligence, population ageing, and the energy transition. The trend has accelerated in recent quarters. Major tech firms are racing to lead the AI revolution. They are increasingly using financial markets for direct recourse. This represents a normalization of interest rates after a period of anomalies.
The average interest rate of the OECD’s main long-term debt benchmarks is now at 2008 levels. This rate sits around 3.7 percent. Central banks have revised their neutral rate estimates upward. The European Central Bank now places neutral rates between 2 percent and 2.5 percent. These institutions are also reducing their footprint in markets. The balance sheet of the euro area has shrunk from 65 percent to 37 percent of GDP. Policy is refocusing on benchmark rates and weekly auctions.
Real yields explain the recent increase
The rise in interest rates is primarily driven by the real component. This is evident in both the 10-year and 30-year bond benchmarks. The phenomenon is particularly clear in the United States. Real rates have settled between 2.5 percent and 3 percent at the long end of the curve. This contrasts with the negative levels seen in early 2022. Medium-term inflation expectations remain just above 2 percent. This development reflects confidence in central banks’ ability to control inflation.
It also reflects changes in the balance between savings and investment. Optimism about the impact of AI investment on long-term growth plays a role. This helps explain the contradiction between rising risk-free yields and strong stock performance. The term premium has not increased significantly for most countries. Exceptions include France and the United Kingdom. The increase is largely due to an upward recalibration of required rates. This recalibration aims to achieve inflation targets. This analysis is based on data from GN markets/policy (en-US).
