Why the rise in government debt is freaking out the bond market

Angela Weiss/ AFP via Getty Images) Mortgage holders know interest rates have risen over the past year, as the Reserve Bank of Australia (RBA) lifted the cash rate to fight inflation.

But mortgage holders are not alone: governments and business borrowers are facing the same pressure.

Australia’s government now has to offer investors more than 5% on its 10-year bonds, which hit a 15-year high on Tuesday after a long period of low interest rates since the global financial crisis in 2008.

In the United States, 10-year interest rates sit around 4.7%, surging nearly half a per cent just this year, while the benchmark 30-year bond is near a two-decade high .

Higher rates mean higher interest payments for governments too, leaving less room for other spending or for tax cuts.

This applies not just to the federal government here but to the states, whose borrowing costs have also jumped.

For example, Victoria’s 10-year bonds now pay an interest rate of 5.55% .

So what’s actually driving market interest rates higher? Supply and demand Governments issue bonds to raise money and finance spending that isn’t covered by tax revenue.

Like any asset, the price of a government bond depends on supply and demand.

Less bond supply means issuers (governments or companies) don’t need to offer higher rates to attract buyers; more supply pushes rates up.

Bond issuance comes from three main sources: households – borrowing for mortgages, which the banks can then repackage into bonds and sell to investors. businesses – issuing bonds to fund operations.

In the US, AI-sector firms such as Amazon and Microsoft have issued about US$240 billion in debt to fund data centres .

Even in Australia, Google owner Alphabet launched a huge A$5.5 billion bond last month. governments – governments often have large debts they have built up because of their past budget deficits.

Like anyone, if you spend more than you earn, you need to borrow.