The world is in a debt spiral and alarm signals are going off

Global bond yields are reaching levels not seen in nearly two decades, creating a threat to economic and financial stability around the world. It’s a threat that has been exacerbated by US policies.

On Monday, Japan’s 10-year bond yield hit a 30-year high of 2.95 per cent amid expectations that the Bank of Japan will raise its policy rate later this month. US 10-year yields also rose, despite the perceived “hawkishness” of the Federal Reserve Board’s chair Kevin Warsh at the weekend’s annual meeting of central bankers and economists at Jackson Hole in Wyoming.

In France, Germany, Italy, Spain and the UK, yields on benchmark 10-year government bonds are at levels last seen before the 2008 financial crisis. Here in Australia, the 10-year bond yield is at its highest level in a decade and a half. Only in China, with growth slowing markedly and expectations of an imminent monetary policy easing, have yields been falling.

The worldwide spike in yields has been occurring across the backdrop of swelling levels of global debt.

The Institute of International Finance (IIF) earlier this year estimated that global debt levels had surpassed $US350 trillion ($488 trillion), or 305 per cent of global GDP, with public sector debt of about $US111 trillion.

At the core of the global bond system is the US Treasury market, where the yield on 10-year bonds has risen from its pandemic-era low of less than 60 basis points in 2020 to 4.75 per cent as US government debt has ballooned from about $US26.5 trillion to more than $US40 trillion.

The rest of the developed world is confronting much the same problem, with the soaring interest costs on vastly increased levels of debt threatening fiscal stability.

US Treasury Secretary Scott Bessent said this week that the only way to manage the exploding debt levels was to grow economies, but that’s more easily said than done.

The debt burdens are a legacy of the pandemic era when government spending exploded around the world. On the IIF’s numbers, about $US100 trillion in debt has been added since the end of 2019. On the International Monetary Fund’s numbers, the rise in gross public sector debt has been from about $US74 trillion to more than $US126 trillion over that period.

Whichever set of numbers is used, global debt is now two to three times the size of the global economy, with gross government debt in most of the developed economies approaching or above their entire economic output. In Japan, it exceeds 200 per cent of GDP; in the US, excluding intra-government holdings, it is about 100 per cent.

When, during the pandemic, yields were negligible, the build up in debt wasn’t threatening. Yet today, as the cost of servicing the debt is soaring, it absolutely is.

If the pandemic bears the primary responsibility for the initial surge in the debt levels, the impact of the war in Ukraine on Britain and Europe, and the Trump administration’s trade wars and its ill-fated decision to join Israel in attacking Iran have exacerbated the financial pain.

On the eve of the launch of the war in the Middle East, the US 10-year bond yield was 3.94 per cent. It’s now 4.75 per cent.