Sovereign debt under pressure

Yesterday, the sell-off in government bonds pushed the yield on 30-year US Treasuries to 5.7 per cent – its highest level since 2002 – and that on British government bonds of the same maturity to around 6.04 per cent (also its highest level since 1998). French OATs have breached the 4.9 per cent mark, returning to the peaks seen at the start of the month. The high levels of public debt in advanced economies are fuelling investor concerns. “France could be the first” to face up to its debt situation, “but it won’t be the last,” Akshay Singal, global head of short-term interest rate trading at Citi, told the Financial Times.

Yesterday, Italy also saw yields on its government bonds rise: the 10-year BTP exceeded 4.6 per cent and the spread climbed to 115 basis points. The rise in energy prices linked to the war in Iran is further fuelling fears of more persistent inflation, with the risk that price rises will spread from energy to other goods and services. Consequently, the global rise in yields is also limiting the scope for government pledges due to increased interest payments, which risk absorbing an ever-larger share of public budgets as debt is refinanced at higher rates (in 2025, Italy paid around 87 billion euros in interest on its debt, an increase of 2 per cent compared with 2024).

Furthermore, higher sovereign yields are also contributing to making credit more expensive for households and businesses. According to figures published yesterday by the Mortgage Bankers Association, the average benchmark rate on 30-year fixed-rate mortgages in the United States rose to 7.49 per cent in the week ending 2 October, the highest level in almost three years. Consequently, it becomes more difficult for households to finance a house purchase, and the same applies to businesses when it comes to investment.