Global Markets Reprice Sovereign Debt After Two Decades of Leniency
For nearly 20 years, developed countries have seen their sovereign debt levels soar without significant market penalties. The United States surpassed a debt-to-GDP ratio of 100%, France approached 120%, and Japan has long maintained a ratio above 200%. Such figures would typically trigger debt crisis discussions in emerging economies, but developed markets largely ignored these warnings. However, last week marked a turning point as long-term government bond yields surged sharply across major economies, reaching levels unseen in years or even decades. In the US, the 30-year bond yield climbed to 5.34%, the highest since 2007, while the 10-year yield neared 4.7%. Germany’s 10-year bonds hit a 15-year peak, and Japan’s 10-year yield rose to 2.945%, the highest since 1996.
Investors are now demanding higher term premiums, reflecting concerns about inflation, government debt refinancing needs, and future financial conditions over the long term. The US government debt has exceeded $40 trillion with persistent deficits, Europe faces growing funding needs for aging populations, infrastructure, and rearmament, and tech giants like Meta, Alphabet, and Amazon are competing for capital to finance massive AI-related investments. This increased competition for long-term capital, combined with the end of easy quantitative easing, is reshaping bond markets.
Japan’s bond market exemplifies this shift. After decades of near-zero yields, Japanese government bonds now offer 3-4% returns, prompting asset managers to develop new products to attract domestic investors back from overseas markets. This is significant because Japan holds about $1.14 trillion in US Treasury bonds, roughly 12% of foreign holdings. A shift in Japanese investment preferences could impact the US dollar and Treasury market.
The US Treasury responded by doubling its buyback program of 10- to 30-year bonds from $2 billion to $4 billion, which temporarily lowered the 30-year yield below 5.2%. This is not quantitative easing but a debt management strategy amid rising yields.
Israel’s bond market currently moves in the opposite direction, with 10-year shekel bonds yielding about 3.8%, well below US equivalents. Israel benefits from low inflation, a strong shekel, and a large domestic savings base, which reduces reliance on foreign investors. However, Israel’s debt-to-GDP ratio has risen from about 60% pre-war to around 70%, with defense spending doubling to 8% of GDP. The Bank of Israel projects a 4.9% deficit this year and stable debt levels near 69% through 2027.
The key takeaway for Israel is that while it is not yet affected by the global selloff in long-term bonds, it faces a new era where global investors scrutinize sovereign debt more closely. Governments worldwide need more funding due to aging populations and rising security costs. Although there is no outright debt crisis or refusal to finance major developed economies, markets now demand higher compensation for holding long-term sovereign debt.
