From mortgages to inflation, concerns about the public finances of major economies have wide-reaching consequences
When Donald Trump was asked recently about the threat of rising interest rates on US government debt, he told baffled reporters: “The ultimate intervention is our military. And if we have to use that, we will.”
Perhaps not surprisingly, his bellicose words did not soothe fractious bond markets, and his resumption of the bombing campaign against Iran only made matters worse.
The past fortnight has seen a wave of instability sweeping through government bond markets in major economies – with knock-on effects for millions of borrowers. The interest rate, or yield, on 10-year US government borrowing hit 4.8% on Friday, up from 4.64% 10 days ago. At one point midweek, the 30-year yield touched its highest level since 2008.
Neil Shearing, the chief economist at the consultancy Capital Economics, said one impetus for the current wobble had been markets taking a fresh look at the state of US public finances. “There’s been a recalibration,” he said.
Total US government debt has surged past $40tn (£29.5tn), and annual deficits are forecast to be an eye-watering 6% of GDP for the foreseeable future.
Such figures were long deemed barely to matter given the status of US government bonds, or treasuries, as the ultimate safe-haven investment. But as the events that led up to the 2008 financial crisis revealed, things don’t matter in the markets until they do.
“I think we are starting to see a more realistic reassessment of the fiscal pressure in the US,” Shearing said. “What marks the US out is that there’s not really an acknowledgment of the fact that there might be a problem. There’s no plan.”
Russell Jones, a veteran bond market analyst at Llewellyn Consulting, said: “The thing about economics is that often markets delay the judgment and, you know, you can’t really time when they suddenly decide that that’s enough.”
The US treasury secretary Scott Bessent’s recent fumbled attempts to intervene in financial markets – to help Tokyo prop up the yen and then to calm bond yields – have only added to the sense that policymakers are panicking.
Layered on top of these concerns is a more immediate worry about inflation taking off again as a result of renewed hostilities in the Middle East. Oil prices have risen back above $90 a barrel since the US and Iran resumed tit-for-tat attacks.
That has increased expectations that central banks will have to raise interest rates – another factor that puts upward pressure on yields.
Every pronouncement by policymakers is being closely scrutinised for clues, including a key speech by the new Federal Reserve chair, Kevin Warsh, last Friday that was read by markets as signalling a willingness to act.
The European Central Bank is expected to lead the charge with a rate rise next week, but markets are telegraphing higher borrowing costs across major economies.
That includes the UK, where investors are now pencilling in three quarter-point rate rises over the next 12 months, and Japan, where the decades-long period of deflation and rock-bottom rates is finally coming to an end.
