The bond market is in trouble across the world.
Long-term government bond yields are rising everywhere from the U.S. to Japan to France to the UK.
Finance is entering a new, more dangerous era.
(a thread)
First, the basics.
A government bond is simply an IOU. A country borrows money from investors, promising to pay it back with interest.
The yield is the effective interest rate. Higher yields = governments pay more to borrow.
A government bond is simply an IOU. A country borrows money from investors, promising to pay it back with interest.
The yield is the effective interest rate. Higher yields = governments pay more to borrow.
Why does this matter? Because government bond yields act as the backbone of finance.
They influence mortgage rates, car loans, business credit, and even stock markets.
When yields rise everywhere, the cost of money rises everywhere.
They influence mortgage rates, car loans, business credit, and even stock markets.
When yields rise everywhere, the cost of money rises everywhere.
Normally, when central banks pause or cut short-term rates, long-term yields fall.
But since 2023, the opposite has happened: central banks are holding steady or signaling cuts, while long yields have surged to their highest levels in decades.
But since 2023, the opposite has happened: central banks are holding steady or signaling cuts, while long yields have surged to their highest levels in decades.
What’s driving this? Four global forces:
• Soaring deficits and public debt,
• Inflation that refuses to fade,
• Central banks’ credibility under fire,
• Shifting investor psychology, the return of bond vigilantes.
And because markets are interconnected, the stress spreads worldwide.
• Soaring deficits and public debt,
• Inflation that refuses to fade,
• Central banks’ credibility under fire,
• Shifting investor psychology, the return of bond vigilantes.
And because markets are interconnected, the stress spreads worldwide.
Let’s start with deficits.
A deficit = when governments spend more than they take in from taxes. To fill the gap, they sell more bonds.
But when too many bonds hit the market at once, investors demand higher yields to buy them.
A deficit = when governments spend more than they take in from taxes. To fill the gap, they sell more bonds.
But when too many bonds hit the market at once, investors demand higher yields to buy them.
The U.S. example is staggering:
Debt-to-GDP is projected near 120% by mid-decade, up from under 80% pre-COVID. Deficits of 6–7% of GDP are appearing even in good economic times.
That’s unusual and puts pressure on U.S. yields.
Debt-to-GDP is projected near 120% by mid-decade, up from under 80% pre-COVID. Deficits of 6–7% of GDP are appearing even in good economic times.
That’s unusual and puts pressure on U.S. yields.
The UK is in the same boat.
Its borrowing needs hit record levels in early 2025. Gilt yields (their long-term bonds) climbed above 5.6%, the highest since 1998.
This echoes the 2022 “mini-budget crisis,” when markets revolted against unfunded spending.
Its borrowing needs hit record levels in early 2025. Gilt yields (their long-term bonds) climbed above 5.6%, the highest since 1998.
This echoes the 2022 “mini-budget crisis,” when markets revolted against unfunded spending.
Japan carries the world’s heaviest debt load over 250% of GDP.
For years, the BOJ capped yields with Yield Curve Control, limiting how high they could rise.
But global pressure forced a shift, and 30-year Japanese yields broke 3% for the first time.
For years, the BOJ capped yields with Yield Curve Control, limiting how high they could rise.
But global pressure forced a shift, and 30-year Japanese yields broke 3% for the first time.
France is now under the spotlight too.
French deficits remain above 5% of GDP, breaching EU rules that aim to keep deficits under 3%.
Its 10-year OATs (Obligations Assimilables du Trésor, France’s benchmark government bonds) rose above 3.5% in 2024 levels not seen since the euro crisis years.
French deficits remain above 5% of GDP, breaching EU rules that aim to keep deficits under 3%.
Its 10-year OATs (Obligations Assimilables du Trésor, France’s benchmark government bonds) rose above 3.5% in 2024 levels not seen since the euro crisis years.
Why does France matter? Because France, alongside Germany, anchors the eurozone.
If French borrowing costs rise sharply, it risks widening the gap with German Bunds, the eurozone’s “safe asset.”
That spread signals investor doubts about fiscal sustainability.
If French borrowing costs rise sharply, it risks widening the gap with German Bunds, the eurozone’s “safe asset.”
That spread signals investor doubts about fiscal sustainability.
Germany itself hasn’t escaped.
Even with a AAA rating, Bund yields climbed as fiscal rules were suspended to fund defense and energy spending.
Though the rise was smaller than in France or the UK, it shows that even disciplined countries are caught in this global wave.
Even with a AAA rating, Bund yields climbed as fiscal rules were suspended to fund defense and energy spending.
Though the rise was smaller than in France or the UK, it shows that even disciplined countries are caught in this global wave.
Canada and Australia saw similar moves.
Both countries face housing-related fiscal pressures, and their long-term yields jumped in tandem with the U.S.
In New Zealand, yields spiked as markets priced in higher inflation risk, showing this is not just a “big economy” story.
Both countries face housing-related fiscal pressures, and their long-term yields jumped in tandem with the U.S.
In New Zealand, yields spiked as markets priced in higher inflation risk, showing this is not just a “big economy” story.
Credit ratings make the divide clearer.
The U.S. lost its AAA status with Fitch in 2023. The UK and Japan are already lower. France is still AA, but agencies warn about rising debt.
Germany and Canada kept AAA but even they’ve seen yields rise. Investors are demanding more across the board.
The U.S. lost its AAA status with Fitch in 2023. The UK and Japan are already lower. France is still AA, but agencies warn about rising debt.
Germany and Canada kept AAA but even they’ve seen yields rise. Investors are demanding more across the board.
Inflation is another global driver.
Inflation = prices rising across the economy, eroding the real value of fixed bond payments.
If inflation stays high, investors won’t accept low yields, they demand higher returns to protect their money.
Inflation = prices rising across the economy, eroding the real value of fixed bond payments.
If inflation stays high, investors won’t accept low yields, they demand higher returns to protect their money.
Normally, slowing growth would pull yields lower. But not this time. Investors see two risks:
– Recession on one side
– Sticky inflation + fiscal stress on the other
Right now, the inflation/debt risk dominates.
– Recession on one side
– Sticky inflation + fiscal stress on the other
Right now, the inflation/debt risk dominates.
Central banks add another twist.
They hiked aggressively in 2022–23. Now they’ve paused. The Fed holds at 4.25–4.50%. The ECB and Bank of England cut rates.
Yet yields rose anyway. Why?
They hiked aggressively in 2022–23. Now they’ve paused. The Fed holds at 4.25–4.50%. The ECB and Bank of England cut rates.
Yet yields rose anyway. Why?
Quantitative Tightening (QT).
For years, central banks bought bonds to hold yields down (Quantitative Easing). Now they’re shrinking balance sheets.
QT = central banks stepping back as bond buyers. Investors must absorb more supply and they demand higher yields to do it.
For years, central banks bought bonds to hold yields down (Quantitative Easing). Now they’re shrinking balance sheets.
QT = central banks stepping back as bond buyers. Investors must absorb more supply and they demand higher yields to do it.
Credibility is also on the line.
Central banks target 2% inflation. If they ease too soon, investors fear inflation will remain above target.
That’s why term premiums extra yield demanded for long-term uncertainty have surged globally since 2023.
Central banks target 2% inflation. If they ease too soon, investors fear inflation will remain above target.
That’s why term premiums extra yield demanded for long-term uncertainty have surged globally since 2023.
Psychology has flipped everywhere.
For the 2010s, investors assumed “low yields forever.” With debt and inflation back, that era is gone.
Enter the bond vigilantes: investors who sell bonds to pressure governments into fiscal discipline.
For the 2010s, investors assumed “low yields forever.” With debt and inflation back, that era is gone.
Enter the bond vigilantes: investors who sell bonds to pressure governments into fiscal discipline.
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