The rise is yields will be used by bond ‘vigilantes’ and pro-business governments to justify further cuts in government social spending and increased taxes on working people
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Wikipedia: US Treasury
The financial media and mainstream economists are in a huge tizz. Government bond yields have risen sharply since the end of the pandemic slump to return to levels not seen since the global financial crash of 2008-9.
What is meant by a rise in ‘bond yields’? When governments and big companies borrow money, they don’t ask a bank for a loan. Instead, they sell IOUs to investors and promise to repay the money with a certain interest rate. If those IOUs are set to be repaid many years from now, they’re called bonds (the IOUs that governments will repay more quickly — within a few months or a year — are called bills or notes.)
These bonds or notes are bought by financial institutions, like insurance companies, pension funds, commercial banks, hedge funds etc. Government bonds are bought most because they are ‘safe’, as governments are very unlikely to default on repaying the bond when the term of the bond ends. Governments are backed by tax revenues and the ability to ‘print money’ to pay back the bond loan. Investors in the bond market often buy and sell these bonds, creating a ‘secondary’ bond price market. Investors do this in order to cash in early before the term of the bond is up or because they look to speculate on changes in bond prices. Bond markets have become the most important source of credit in capitalist economies and their size is much larger than stock markets.
But here is the rub. The interest rate on the bond is fixed. If the bond starts to look less attractive to buy (for reasons we discuss below), a buyer going into this ‘secondary market’ for bonds may be able to get a bond that was originally worth $100 when bought from the government for less than that. Any drop in price means that the new buyer will get a bigger return, percentagewise, on their money than the fixed interest rate the bond pays on its original face value. This return is called the bond’s yield. When investors sell bonds that pushes down bond prices, just like a stock market sell-off causes stock prices to plunge. When bond prices fall, that lifts bond yields, which move in the opposite direction.
That is what is happening now in all the major government bond markets globally. Prices are falling in the secondary bond market and so inversely yields are rising. Global bond yields have risen to their highest since 2008.
The UK’s long-term borrowing costs have jumped even more to their highest level since early 1998, while Japan’s ten-year yield has reached 3% for the first time in 30 years.
Japan’s Ten-Year Bond Yield Hits 3.00% for First Time in Three Decades
What are the possible causes of this rise in yields and why are investors and financial analysts making such a fuss? There are four main reasons presented by the experts: rising global inflation; high government debt; booming private capital investment increasing borrowing needs; and increased uncertainty about a future economic crisis.
Let’s take inflation. As I have argued in previous posts, the era of disinflation (ie slowing inflation rates) that most advanced economies experienced during the Long Depression of the 2010s is over. Since the end of the pandemic slump in 2020, there has been a steep change up in inflation. Whereas the annual inflation rate in the advanced economies was generally below 2% a year during the 2010s, ie below the target inflation rate that most central banks had set, now it is double that rate. According to the IMF, annual global headline inflation is expected reach 4.7% this year.
I have discussed what has caused this sustained rise in inflation in previous posts. It has been mainly driven by rising costs of raw materials and transportation started by the post-pandemic global supply chain bottlenecks. More recently that has been accelerated by the conflict in the Middle East, particularly Iran and the closure of the Strait of Hormuz, which has pushed oil prices 50% higher. These higher energy costs feed right back into general inflation. And it is not just energy; a whole range of key commodities have come into short supply due to the war in Iran, rising global warming and dislocation of transportation. So rising inflation is not the result of ‘excessive’ government spending or wage increases, but a supply-side issue, compounded by slowing productivity growth which tends to raise the unit cost price of goods and services.
Historically, bond yield surges are usually due to rises in inflation. It’s simple. Rising prices make bond purchasers think that the nominal annual fixed interest they will get from the bond will be devalued over time by inflation, so the real return they get will fall. So bond holders will only buy bonds in the secondary market at lower prices to compensate. As we have explained above, falling bond prices means higher yields. Also governments issuing new bonds will have to offer higher fixed rates to attract new purchasers.
In my view, this is the main cause of the current ‘bond bust’ or sharply rising yields. However, other reasons are offered. You see, many governments around the world are running large budget deficits and borrowing more money. Government debt levels are rising absolutely and even against national output. To cover these deficits and to ‘roll over’ bonds that are ending their term, governments must issue more bonds. So supply rises faster than demand by purchasers. That forces governments to offer higher interest rates and yields in the secondary market rise.
What’s worse is that central banks, in their misguided mantra that tightening monetary policy (ie raising short-term interest rates and reducing money supply is necessary and effective in controlling inflation, are all beginning to talk about hiking their policy interest rates over the next few months.
The European Central Bank has already started to do this as Eurozone inflation rates continue to rise. The new Chair of the US Federal Reserve, Kevin Warsh, appointed by Trump to cut interest rates, is now hinting that US rates will have to rise. The Bank of Japan, frightened that Japanese inflation, historically nearer to zero for decades, is beginning to explode, is also preparing to hike. If these hikes materialise, they will not curb inflation, but simply add to the borrowing costs of the government and so add to the level of debt, and also spread through the economy, increasing the cost of borrowing for households (mortgages) and businesses (loans).
There is even talk that some major governments may default on their debt. Foreign investors in French government bonds are raising this fear. But behind this claim is really an attempt by the French government to impose further measures of austerity on its people, namely reductions in pension benefits and other social spending. Default is not going to happen. First, although government bond yields are up since 2020, they are not historically high, even in France..
Sure, the size of gobernment debt is much higher than 20 years ago. But that is due to the governments having to bail out on at least two occasions the private sector; first in the global financial crash of 2008-9; and second during the pandemic slump of 2020. It is just not true that there has been ‘profligate spending’ by governments on welfare, medicare and pensions, as the ‘bond vigilantes’ and mainstream economists claim. The only profligate spending, apart from the bailouts of banks and corporates, has been on defence combined with cutting taxes for the rich and corporations (eg Trump’s ‘big beautiful’ budget).
The reason that public sector debt has risen so much in the 21st century was the bailing out of the finance and private sector during the global financial crash of 2008-9, the euro debt crisis through to 2012, and the fiscal support necessary for people to get through the pandemic slump of 2020. Those were the periods when government debt ratios rocketed (see figure below, blue block). In the periods in between, policies of austerity were applied (particularly cutting welfare benefits and investment in infrastructure), along with some recovery in economic growth, so debt ratios were more or less stable (see figure, orange block). Cuts in income (particularly for higher income groups) and corporate profits taxes, meant that government tax revenues as share of GDP have remained flat at around 35% of GDP, ensuring a rise in annual deficits.
Higher government debt levels mean higher interest costs (ie the interest paid on the government bonds sold to the bond investors). In the US, the estimated annualized interest expense on US federal debt is up to a record $1.38 trillion. This is equivalent to 4.2% of US GDP, the highest percentage since 1997. By comparison, this figure stood at 2.3% in Q4 2020. Annualized interest expense has surged $900 billion, or nearly 200%, over the last five years, rising at an average annual rate of 24%. Meanwhile, in the first nine months of fiscal 2026, interest expense jumped $78 billion to $827 billion. The cost of servicing US federal debt has never been higher. Now if central banks hike interest rates, the cost of servicing the debt will rise even more.
The fourth reason that bond yields are up is uncertainty about the future of economies. Bond investors demand a higher ‘term premium’ —extra interest— for locking their money away in long-term bonds for 10 or 30 years because they fear future economic crises. This term premium, as measured by the US Fed, has added about 0.6% pts to the bond yield in the last year.
But there won’t be any government bond defaults, because governments can always resort to what economists call ‘financial repression’. ‘Financial repression’ is a pejorative word used by mainstream economists who see government intervention as ‘distorting’ bond prices. Governments and central banks can always promise to meet any debt repayments by ‘printing money’ to do so. In the 2010s, this was called ‘quantitativ easing’. This is what the ECB did under Mario Draghi when he was the boss during the Eurozone debt crisis of 2012-15. By committing to unlimited monetary arrangements (‘outright monetary tranactions’, they were called), bond holders were reassured that they would get their money back. Draghi said the ECB would do ‘whatever it takes’ to repay debt and get borrowing costs down.
Even now, borrowing costs in, for example, France, are much lower than they might otherwise be thanks to that threat of financial repression. And it has recently been partially used by the US government. US Treasury secretary Scott Bessent has started a small Treasury buyback scheme where the government buys back its long-term bonds by issuing short-term Treasury bills. The US government has $1trn in ‘excess’ funds in its ‘general account’ that it could use.
But such measures of financial repression have consequences. Most significant, it would increase the money supply injected into the economy and that would mean a fall in the dollar as the supply of dollars in the world would rise compared to other currencies. Given that the US still imports huge amounts of necessary goods, import prices would rise and spread into general inflation. Also a falling dollar would make foreign investors in US government dollar bonds less likely to buy them and thus drive up yields. Financial repression is self defeating and a policy of desperation only in a crisis.
But will there be a crisis? There are some who not only deny that the current rise in bond yields will not lead to a crisis; they go further and argue that the rise in bond yields actually expresses a booming and successful economy. Trumpist Federal Reserve governor Steve Miran argues that the ‘fast growing’ (!) US economy and the AI boom are driving up bond yields for the right reasons – ie increasing demand for credit to invest. This argument is also being promoted by Keynesian Matthew Klein who reckons rising bond yields are good news. “The simplest explanation is also the most benign: traders are becoming increasingly confident that the lost decades are over,” says Klein, “higher interest rates can help to the extent that they can discourage those lower-priority activities and/or encourage people in the rest of the world to accept promises of goods and services in the future in exchange for actual goods and services today. In this context, the current level of interest rates looks downright benign.”
But this argument does not hold water empirically. The differential between bond yields and yields after inflation is deducted has steadily risen since 2020. Since the end of the pandemic, US ten-year government bond yields have opened up a gap with real ten-year yields (ie excluding inflation) of 2.7% pts, a rise of 1.7% pts since 2020. Indeed, the real yield is currently below that in March 2023 – hardly an indicator that it is the AI boom is dirivng up the cost of borrowing, rather than inflation.
It’s true, as Marx expained (Capital Volume 3), that in periods of expansion in the business cycle, the rate of profit on capital invested will rise, allowing interest rates to rise without squeezing net profit (the ‘profit of enterprise’). But when the general rate of profit falls, net profit gets squeezed if interest rates continue to rise and then a crisis can eventually ensue. But that crisis will emerge in the private sector, not in the government sector, which will be used to bail out the former. The graph below is from Henrique de Abreu Grazziotin’s paper here.
Currently, the AI boom in the US has achieved a relative expansion in profitability so a rise in rates of interest may not trigger a crisis yet, unless interest rates rise a lot more. For now, the bond bust or the apparent crisis expressed in rising bond yields mainly reflects rising inflation, along with the risk that cntral banks will increase the cost of borrowing by raisng rates in an attempt to control inflation.
If and when inflation subsides, so will bond yields. In the meantime, there will be no bust in the sense of any government in a major economy defaulting on its debt. Instead the rise in yields will be used by bond ‘vigilantes’ and pro-business governments to justify further cuts in government social spending and increased taxes on working people to improve what they call ‘fiscal space’ – space to be used to increase arms spending and subsidies for industry.
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