Global shockwaves hit sovereign debt

The ongoing uncertainties in the Middle East and fears over rising inflation have triggered one of those shocks to global debt that perhaps not even Scott Bessent expected. The day before yesterday, the US Treasury Secretary complained that the world is ‘drowning in debt’, prompting Minister Giancarlo Giorgetti to clarify that Italy’s debt ‘is no longer a problem’. Bessent had not even finished outlining his solution to the problem (“the only way is to grow”) when, last night, global markets witnessed the classic ‘sell-off’ of government bonds – that is to say, a massive sell-off – as investors began to factor the cost of inflation into their returns, demanding higher yields. Otherwise, they will empty their portfolios. According to analysts, sovereign bond yields have returned to their highest levels since 2008, driven by the rise in oil prices, which is fuelling fears of inflation and triggering expectations that central banks will raise interest rates. Higher rates automatically drive up the cost of debt for governments. After all, if even Trump’s chosen Fed chairman, Kevin Warsh, is considering raising rates, then there is cause for concern. So yesterday, from Japan to the United States, from the Eurozone to the United Kingdom, government bond markets began to stir, with 10-year US Treasuries reaching 4.78 per cent – a level not seen since January 2025. Technically, the markets are pricing in the expected rise in interest rates on both sides of the Atlantic; from a more practical perspective, they are expressing concern about governments’ ability to service their debt at rising costs at a time when fiscal demands are increasing (healthcare and security, for example). How will they finance themselves? Taxing the windfall profits of banks and energy companies is one solution that is gaining ground in Europe, but it is not without its drawbacks from an investment perspective.