By Nigel Green
The single greatest danger to wealth anywhere in the world right now is the colossal pile of money governments have borrowed. Bond markets are flashing warnings last seen during the eurozone crisis, and they’re getting louder by the week.
The IMF’s own figures are staggering. Global public debt reached 93.9% of GDP last year and is on course for 100% by 2029, beyond anything recorded since the end of the Second World War. The cost of servicing it has climbed from 2% of world output to almost 3% in just four years.
Government bonds sit underneath everything. Mortgage rates, corporate loans, pension values and share prices are all built on what governments pay to borrow. Shake that foundation and every asset stacked on top of it starts to wobble.
Right now it’s being shaken harder than at any time in decades.
Once the cycle starts, it feeds itself. Swelling interest bills widen deficits. Wider deficits demand fresh borrowing. Fresh borrowing drives yields higher again. Governments caught in this loop find it extraordinarily hard to escape.
Britain is closest to the edge, and it’s where I’m most concerned in the short term. Yields on 30-year gilts hit 6.036% last week, the highest since January 1998. No G7 economy has paid that much since the euro crisis peaked in 2012. The 10-year yield is hovering near its highest level since 2007.
Into this storm walks Chancellor John Healey with his first budget on October 28. A heavy deficit, dependence on imported gas and markets ready to tear apart every line make it a perilous moment. Homeowners rolling off fixed-rate mortgages and businesses refinancing debt will feel any misstep immediately.
Across the Channel, France is in even worse shape. Its 10-year borrowing cost has reached 4.92%, a level unseen since 2002, and the gap over Germany has stretched to 152 basis points, the widest since 2011.
France now pays more to borrow than Italy or Greece. A few years ago, anyone predicting it would have been laughed out of the room. Debt is heading towards 121.7% of GDP, and annual interest costs are closing in on €91 billion. Confidence can vanish at frightening speed when politicians refuse to fix the numbers.
The squeeze is global. The US is running a deficit of 7% to 8% of GDP with no serious plan to tackle it, and its debt is projected to hit 142.1% of GDP by 2031. The 10-year Treasury yield has surged to 5.34%, its highest since 2002, after the sharpest quarterly jump since 1994.
Japan’s 30-year yield has struck a record 4.24%. China’s debt is forecast to reach 126.8% of GDP.
Borrowing costs are soaring in the US, Japan, the UK and France at the same time, and this is what makes the moment so dangerous. In past debt scares, central banks rode to the rescue by buying bonds. With oil above $100 and inflation climbing again, the escape hatch is largely bolted shut, and traders know it.
The damage won’t stop with bondholders. US stocks are trading near record highs, carried by a small group of technology giants valued on profits expected years from now. Higher yields hit exactly those valuations hardest, along with property and the AI names that have powered this rally.
Britain’s pension fund crisis in 2022 showed how quickly a bond rout can force selling across every other market.
The coming weeks are a gauntlet. October 28 brings the UK budget and the Federal Reserve’s rate decision on the same day. France faces a bruising budget fight in a fractured parliament, and long-dated bond auctions loom in the US, UK and Japan.
Credible plans to rein in borrowing could take the heat out of markets fast. Bond investors reward governments that show discipline, and they can be surprisingly forgiving when it arrives.
Some of the world’s largest economies have let borrowing run wild for far too long, and the lenders are now setting the terms.
Governments that act will buy themselves breathing room. Those that keep dodging the issue will have discipline forced on them, and the bill will land on savings, pensions and mortgages around the world.
Nigel Green is deVere CEO and Founder
Also published on Medium.
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