Governments Scramble as Rising Interest Rates Exacerbate Debt Burden
Across the world, governments are facing increasingly punishing debt servicing costs due to rising interest rates. This has led to multi-decade highs in the cost of servicing government debt, with over $100 trillion worth of government debt now paying higher interest rates.
As recently as December 2020, more than $18 trillion of government debt had a negative interest rate, but today none attracts such low yields. This shift has left governments with a painful financing backdrop, where trillions of extra dollars, pounds, euros, and yen are spent on interest payments.
Central banks have raised rates to combat inflation, which has re-emerged as a concern due to trade wars, energy market disruptions, and AI-related investment. This has led to the sale of government debt by central banks, with the amount owned decreasing from $38 trillion at its peak to $28 trillion today.
Large US corporates have been actively issuing their own debt, competing with governments for capital. In Japan, the export of savers' capital to buy higher-yielding debt risks going into reverse.
US Treasury Secretary Scott Bessent has intervened by buying back long-dated US debt and selling euros in favor of yen. This move comes as President Trump mentioned military intervention in the bond market as the 'ultimate intervention.'