A mountain of debt and inflation are sending shockwaves through all the markets

Yields on government bonds are rising at an alarming rate across all developed countries. The fear in the financial markets is that if this trend continues, it will prompt investors to liquidate their bond holdings, creating a spiral of instability. At the same time, the burden of public debt continues to rise, against a backdrop where governments are facing serious difficulties in implementing fiscal consolidation measures.

The most telling example is that of Japan, where yields on government bonds have risen by 90 basis points since the start of the year, approaching 3 per cent – the highest level in the last 30 years. With public debt exceeding 200 per cent of GDP, the debt burden will rise rapidly in the coming years. Equally worrying is the trend in yields on Treasuries – US government bonds – which have risen by 60 basis points over the course of 2026: the debt burden is steadily increasing and has now exceeded US military spending.

In Europe, the most worrying situation is in the United Kingdom, where 10-year yields have risen above 5 per cent, the highest level since the 2008–2009 financial crisis. In France and Italy, yields have risen by around 60 basis points.

The main explanation relates to inflation expectations, which have risen due to fears that commodity prices will remain high for some time to come. Consequently, interest rates will most likely have to rise further and remain high for longer than expected before inflation can return to the 2 per cent target.

These expectations are reinforced by the trend in public debt in most countries. In the United States, in particular, projections indicate that debt will rise to over 140 per cent of GDP by the end of this decade.

Investors are not concerned that the US Treasury might default, as happened in Greece in 2010–2011. However, they expect that, should there be difficulties in refinancing the debt, the US Federal Reserve will not hesitate to intervene – even under pressure from the White House – to buy securities on the market at low rates – a move which, over time, will lead to higher inflation.

The US Treasury’s interventions in the government bond market in August – involving the sale of short-term bonds and the repurchase of long-term bonds – have only served to reinforce these fears. Moreover, those interventions were ineffective, as US long-term interest rates have continued to rise.

This explanation – which links the evolution of long-term interest rates to the dynamics of public debt in various countries – is confirmed by a comparison with countries that have more orderly public finances, such as Switzerland, where 10-year rates have risen by only 10 basis points over the past year; or Canada and Sweden (30 basis points); or Germany (50 basis points).

There is only one country that bucks this positive correlation between rising public debt and rising interest rates: China.

In fact, China’s debt is growing at an even faster rate than that of the US. According to estimates by the International Monetary Fund, China’s public debt has doubled in less than ten years, rising from 50 per cent of GDP in 2016 to 100 per cent last year. Over the next five years, it is expected to reach 130 per cent, driven by a public deficit that remains at around 8 per cent of GDP.

Despite this trend, Chinese long-term interest rates have fallen by 20 basis points over the past year, reaching an all-time low of around 1.7 per cent. Part of the explanation lies in China’s very low inflation, which is below 1 per cent. Furthermore, growth in the Chinese economy is gradually slowing, currently standing at around 4 per cent.

The main difference compared with developed countries is that China does not need to issue government bonds on the financial market. China’s public debt is largely held by local, state-controlled banks, which are funded by non-interest-bearing household deposits. This allows the state to borrow at low rates, avoiding pressure from the financial markets.

However, this system is not without its drawbacks. In fact, the so-called ‘financial crackdown’, which narrows the range of choices available to savers, is driving Chinese households to save even more, partly to compensate for the lack of a comprehensive welfare system. This depresses consumption and slows economic growth, which now depends more on exports than on domestic demand.

In short, the more interest rates are cut to facilitate the financing of public debt, the less the Chinese economy grows. A spiral which, once again, is unsustainable.