The perfect storm has arrived in the world of public debt. It is not the first time this year. Nor since Donald Trump was elected president of the US for a second time in January 2025, but every time investors have decided to flee the sovereign bond market, the response from the US Administration has been to backtrack and announce measures to boost confidence in its economy. With the end of the year approaching, financial markets face the new term with renewed fear over the excessive debt of some governments – such as the US, French, or British -, with the increasingly certain belief that central banks will step up interest rate hikes to contain inflation and, this leads to a third factor, which is the price escalation driven by the intensification of the war in the Middle East.
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Against this backdrop, the role of debt markets has only just begun. Global bonds have shot up their yields to 3.72%, levels not seen since the great financial crisis of 2008. This return is the average of bonds traded from the states that are part of the ‘Bloomberg Global Government Bond Index’, which is the benchmark index used by institutional investors to gauge the market temperature. Enough to set off alarms again, in a summer where fixed income has been the main protagonist globally. Over the past two weeks, public debt sales have been accumulating, while the conflict between the US and Iran escalated and the risk of higher inflation and slower growth in the world’s largest economies increased. Added to this as the icing on the cake are the new and trillion-dollar financing needs of the large American tech and artificial intelligence companies that, for the first time, have gone to the market to raise money. In these last two weeks, the 30-year US bond rose to 5.31%, the highest since 2007, while the 10-year bond yield has already reached 4.78%. If the T-note surpasses 5%, it would be considered a critical signal for investors.
In the case of Europe, the level to watch is 3.5% for the German 10-year bond. “Reaching these thresholds would mean entering a scenario of maximum tension for debt markets,” say Banca March. Today the bund bounces up to 3.32%, its highest level since 2011, in the midst of the sovereign debt crisis, and its Spanish counterpart stands this Tuesday at 3.80%, at 2023 levels. On the other side of the map, the yield on Japan’s 10-year bond touched 3% this Tuesday, its highest since 1996.
Analysts consider the speech by the US Federal Reserve chairman, Kevin Warsh, last Friday during the Jackson Hole symposium, a critical point, in which he toughened his tone in the fight against inflation. The reality is that the market had been asking for clarity in the Fed’s speech for weeks, and this is what it got, although today its consequences translate into massive sales of US public debt, questioned due to its historic deficit levels. “We do not yet consider the battle won, as very weak data in August could change the outlook. But, unless there is a major negative surprise, the responsibility now falls on Warsh to carry out that hike in September. Otherwise, in our opinion, he risks undermining some of the credibility he gained on Friday,” say Bank of America analysts.
“It is premature to talk about a sovereign debt crisis. The main reason is that the nominal growth of economies still allows generating sufficient tax revenues to finance public deficits. However, they do constitute a sample of the risk involved in holding positions in sovereign bonds with such long maturities in the current context. The persistence of high energy prices, combined with expansive fiscal policies in the three main developed Western economies, the United States, Japan, and Germany, suggests that investors will continue to demand higher yields that better reflect the current reality”, conclude Banca March.
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Just this morning Eurostat, the community statistics office, revealed the August CPI which climbed to 3.3% year-on-year, its highest growth rate in three years, due to rising energy prices, which surged more than 14% in a summer where fuels and gas have risen relentlessly, while the armed conflict around the Strait of Hormuz continues. That 3.3% advance revealed in August is exactly the ECB’s forecast for an ‘adverse’ scenario, the third worst of the four considered by the institution, looking towards the end of 2026, according to the macroeconomic projections table presented in June and which is the latest update available pending the one to be announced next week. On September 9 and 10 the European Central Bank (ECB) will meet the governing council to decide whether to carry out a second interest rate hike in the eurozone by another 0.25 percentage points, up to 2.65% for the main refinancing rate that affects the cost of bank loans, such as mortgages. The market takes for granted that its president, Christine Lagarde, will make this increase considering the poor inflation data known today, which far exceed the institution’s 2% medium-term inflation target.
Before things get worse, various analysis firms point to an important counterbalance to contain tensions: the massive bond purchases announced by the US Treasury two weeks ago of long-term bonds. “It could limit for now the extreme risk of a sharp drop in the bond market, but these measures clash with Fed chairman Warsh’s plans to reduce the balance sheet size, which dampens their impact on the markets,” say Generali Investments. From PIMCO, the world’s largest fixed income manager, economist Tiffany Wilding says that “buybacks can contribute to the smooth functioning of the market and reduce, on average, the Treasury’s financing costs over time,” although she warns that “the Treasury alone cannot completely alter the fundamentals that determine the valuation of longer-term Treasury bonds.”
According to their estimates, if the Treasury increased the weight of bonds from the current 22% to 24%, “it could buy $630 billion in the 10 to 30-year segment,” a capacity that, although not unlimited, “does rival the volume of purchases made by the Federal Reserve during previous quantitative easing (QE) programs.”
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