The United States is on the brink of a significant economic milestone, with its national debt expected to surpass the US$40 trillion mark and projected to reach US$50 trillion by 2029. Interest payments alone have cost US$1.4 trillion in the past year, fuelling unease among global bond investors. Long-term government bond yields have surged worldwide, with the US 30-year Treasury yield hitting 5.31 per cent, its highest since 2007. Similar spikes are observed across France, Germany, Japan, and the UK, while Australia’s 30-year government bond yield has climbed 18 basis points recently to 5.63 per cent.
This uniform upward pressure on yields stems from several factors. Firstly, investors are increasingly concerned by rising government debt and deficits, alongside a perceived lack of political will to address these issues. Jonathan Armitage, chief investment officer at Colonial First State, noted a preference to lend to companies over governments. Secondly, government bonds face stiff competition from surging corporate debt, particularly from major tech firms. Alphabet, parent company of Google, traditionally self-funds capital expenditure but is now increasingly issuing debt to finance global artificial intelligence infrastructure rollout. Big tech companies have issued an estimated US$200 billion in new bonds this year, drawing capital.
Another key factor is a shift in US Treasury ownership from price-insensitive official sector holders to more demanding private investors, who require higher yields for longer-dated debt. Furthermore, uncertainty surrounding new Federal Reserve chair Kevin Warsh’s communication approach, particularly his aversion to forward guidance, has raised concerns about persistent inflation. While rising yields have yet to fully derail equity markets, with investors focused on strong US earnings from the AI boom, initial signs of impact on tech stocks are emerging. Market watchers are closely monitoring whether sustained higher borrowing costs for governments will begin to weigh more broadly on share markets, challenging the current bullish sentiment among global fund managers.
