Oct. 13, 2026, 3:55 pm ET
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4 min read
Even boring old bonds can get exciting sometimes. Since July, they’ve been especially feisty. Interest rates on the 10-year U.S. Treasury bond have jumped a full percentage point to levels not seen in more than 20 years.
That quick rise in interest costs is now reverberating throughout the global economy.
In the United States, it is pushing up interest rates on everything from mortgages to small business loans. More worrying, globally, it is making it much more expensive for heavily indebted governments to service their debts.
Ironically, government bonds – that safe place where investors park their money when stock markets get dicey – are now themselves stoking uncertainty and fear.
At the heart of that fear is the possibility that one or more nations could default on their debt. These nations aren’t the usual suspects: developing countries with weak economies and small footprints. They’re major, developed nations.
The current focus is on France.
In two months, the yield on its 10-year government bond has jumped a full percentage point as successive governments have failed to push through austerity measures. Its deficit is expected to rise to a whopping 5.4% of its GDP this year, a measure of the size of its economy.
Already, the French government spends more on interest payments than on anything else except pensions and healthcare. Now that those interest rates have jumped, the crisis has become that much more immediate.
The government under outgoing President Emmanuel Macron is trying to push through another austerity package. Two of the major candidates running to replace him in elections next April have put forward deficit-cutting plans in the past week.
Still, students around the country are protesting in the streets to pressure the government to spend more money on education. Economists point out that Italy, Belgium and Greece face similar debt default risks.
“We cannot keep delaying necessary policy action,” Kristalina Georgieva, head of the International Monetary Fund, said in a speech last week. “My message is: Get your house in order.”
In a report released Tuesday by the IMF, the organization noted that global financial markets have been stable so far this year, but “resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil.” Government bonds serve as a linchpin for economic stability, especially America’s 10-year Treasury bond.
What’s driving bond market volatility
But the U.S. is even more indebted than France. It also has a few advantages. For one, its economy is growing solidly; French growth is weak. That means that while American government interest payments are growing faster than French payments, they are growing more slowly when compared to the overall economy. This ratio – interest payments divided by GDP – is considered a better predictor of a nation’s fiscal stress than the conventional measure of debt to GDP, according to new research co-authored by Barry Eichengreen, an economist at the University of California, Berkeley.
France paid some 62.2 billion euros ($69.6 billion in today’s dollars) last year in government interest, according to the IMF. It forecasts 75.1 billion euros this year and 86.5 billion in 2027. In all, that’s a 39% jump in taxpayer costs over two years. In the U.S., it forecasts interest costs to rise 34% during the same period.
Another U.S. advantage is that the dollar serves as the world’s reserve currency, underpinning much of the globe’s economic activity. That has typically allowed the U.S. to borrow at cheaper rates than other nations. It also means that in times of crisis, investors overseas shift money into U.S. government bonds, particularly the 10-year Treasury.
It’s “the most important asset anywhere in the world,” Federal Reserve Chairman Kevin Warsh said at a press conference last month. “It’s the risk-free asset upon which every price of virtually every asset in the world is related to.”
The rapid rise in its yield, however, suggests the 10-year bond is no longer as risk-free as it once was. Investors are now demanding a higher interest rate to buy the bonds that the U.S. Treasury is auctioning off.
Why this is occurring is subject to debate. It involves a mix of factors, including stubborn inflation, high energy prices, hints of a strengthening economy, competition with corporate borrowing for artificial intelligence, Federal Reserve policy, and concerns about America’s burgeoning debt. But market analysts and economists disagree on the primary drivers behind this rise.
On the positive side, the higher rates on government debt are causing more investors to pile into bondswhich should help stabilize interest rates. Stronger economic growth would also help. Treasury Secretary Scott Bessent last month suggested that if the U.S. grows at a 3% clip and contains spending, it can grow its way out of its debt problem.
On the negative side, bond investors may be losing confidence in America’s ability to pay its debts. Growing AI adoption has yet to show that it will boost productivity and, thus, economic growth. If, instead, government debt consistently rises faster than economic growth, the squeeze will get tighter.
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That would represent a sea change from the low-interest environment that nations have long enjoyed.
“Policymakers had a relatively easy ride over the last 17 years as for all that time interest rates were stuck below GDP growth rates,” Ms. Georgieva of the IMF said last week. “To quote from Game of Thrones, winter is coming.”
Source: www.csmonitor.com
