The Peace Tower in Ottawa in December, 2024. It’s getting costlier for governments to borrow money, writes Matt Lundy.Adrian Wyld/The Canadian Press
It’s rarely a good sign when the bond market is creating headlines. Earlier this week, the 30-year U.S. Treasury yield hit 5.2 per cent, its highest level in 19 years. The equivalent debt in Britain is yielding the most since the late 1990s. And while Canada’s 30-year bond yield is relatively muted at around 4 per cent, it’s rarely reached those levels since the global financial crisis in 2008.
Simply put, it’s getting costlier for governments to borrow money. Term premium – the additional compensation that investors demand for holding long-term sovereign debt, rather than rolling over a series of short-term bonds – is much higher today than in recent memory.
The bond market is influenced by a range of factors, including tax-and-spend policies, the outlook for inflation and monetary policy, and a country’s demographics. Even before the Iran war led to hotter inflation, many countries were looking to borrow heavily for defence spending.
But lately, economists have flagged their concerns with huge and persistent deficit spending, particularly in the United States. The U.S. is running annual federal deficits in the neighbourhood of US$2-trillion. At around 6 per cent of gross domestic product, U.S. deficits of that magnitude were once reserved for economic crises.
“With rate cuts no longer in the cards, war ongoing in the Middle East, and governments finding it difficult to rein in spending, investors appear more concerned about fiscal pressures,” Royce Mendes, head of macro strategy at Desjardins Securities, wrote in a client note on Tuesday.
Ajay Rajadhyaksha, global chairman of research at Barclays, was blunt in a Monday note: “The story right now is simple and uncomfortable. The developed world has too much debt, too little fiscal discipline, and no political appetite for fixing either.”
Decoder is a weekly feature that unpacks an important economic chart.