4 minEconomy
Global bond selloff signals markets have lost patience with rising government debt
A global bond selloff that pushed yields to two-decade highs shows investors have finally lost patience with mounting government debt, economists say, as deficits, oil prices and policy uncertainty converge.
The global bond selloff that sent yields to their highest level in two decades marks a turning point for financial markets, where concerns over government debt have now overtaken the artificial intelligence boom as the dominant worry on Wall Street. For years, investors brushed aside dire warnings about the spiraling trajectory of U.S. debt, but economists say the market's patience has finally run out.
«When does debt become unsustainable? When the global financial markets say it is,» RSM Chief Economist Joseph Brusuelas said in a note Wednesday. «That appears to be happening.»
The selloff was not confined to the United States. Yields in other major economies, including the United Kingdom, France, Germany and Japan, also surged. Since the COVID pandemic, governments have continued spending as if borrowing costs were still at crisis-era lows, letting deficits worsen as if their economies still needed emergency stimulus. But the economic landscape has changed: interest rates have risen sharply in recent years to combat high inflation, and the AI boom is pouring hundreds of billions of dollars annually into an economy that has become increasingly immune to higher rates.
Adding to the pressure, so-called hyperscalers are relying more on debt to finance their capital expenditures, competing with the Treasury Department for bond market dollars. «Given that public debt is already so high for many countries, it's only been a matter of time until markets run out of patience,» Robin Brooks, a senior fellow at the Brookings Institution, wrote in a Substack post Tuesday. «It looks like that's happening now.»
The rapid rise in yields prompted the Treasury Department to announce it will increase buybacks of long-dated bonds. The move briefly lowered yields, but they climbed back up as investors doubted such financial engineering could hold back the tide.
Beyond deficits, several factors converged to set off alarm bells. The more proximate cause was the return of higher oil prices amid the ongoing stalemate between the United States and Iran. With no signs of diplomatic progress, investors expect energy costs will keep inflation higher for longer, likely forcing central banks to hike rates. Federal Reserve Chairman Kevin Warsh has refused to offer forward guidance on how policymakers will respond to future inflation, creating uncertainty that put additional upward pressure on bond yields.
Brusuelas also pointed to an «elephant in the room»: economic populism from both sides of the aisle. From the left, it takes the form of more spending; from the right, it is typically tax cuts. Both versions tolerate higher inflation and resist efforts by central banks to rein it in, he added. «If such policies go on long enough without a course correction, banking and currency crises tend to follow,» Brusuelas warned. «Global investors understand the end game of such policies.»
Analysts at Capital Economics said in a note Tuesday that bond investors are demanding greater compensation for fiscal, geopolitical and policy uncertainty, describing it as a shift that will prove persistent. While the pace of the bond selloff is not justified by recent events, the market's concerns are rational as governments show little indication of curbing deficits, they added. That means a higher term premium — the extra return investors demand for holding an asset over the long term — is «fundamentally warranted.»
«As a result, we expect term premia to remain elevated and bond markets to remain susceptible to renewed bouts of volatility in the quarters ahead,» Capital Economics predicted.
