Bond Market Gives World Leaders an 'F'

“If you're a global bond investor, you've had a lot to fret about lately. Government deficits are out of control, inflation is stubborn, and geopolitics, from trade wars to actual wars, threaten to make both worse.

 

You probably noticed that the government officials who can presumably do something about these things got together this week for a G-20 summit. You may have hoped they'd do something, anything, to put your mind at rest.

 

Judging by the rise in bond yields this week, you've been disappointed.

 

The preponderance of attention has been on U.S. Treasury yields, with the 10-year hitting 4.8%, the highest of Donald Trump's presidency, this week. But this is not only -- or even mostly -- a U.S. story. Yields have risen more in Japan, where the 10-year yield hit 3% for the first time in 30 years, and just as much in Europe. France's 10-year yield, at 4.25%, is up 0.69 percentage point this year. Britain's, at 5.16%, is up 0.68 point.

 

All, like the U.S., are struggling with energy-induced inflation and gargantuan debts, without the benefit of American tech-led growth. France's minority government is barely capable of passing a budget. Japan's prime minister is using her massive majority to spend more, not less.

 

Nonetheless, all eyes turn to the U.S. for leadership at moments like these. It has the largest and most important bond market, the most influential central bank and the reserve currency. It started the war with Iran, and can presumably end it. It also hosted this year's G-20.

 

Treasury Secretary Scott Bessent and his fellow central bankers and finance ministers in Asheville, N.C., aren't personally responsible for rising bond yields. But their proceedings displayed a lack of seriousness about tackling the ultimate cause.

 

"The world is awash in debt . . . and the only way for us to get out of this is to grow our way out of this," Bessent said.

 

This doesn't seem like a credible solution. First, growth hasn't come to the rescue yet. U.S. gross domestic product is up 2.1% in the past 12 months, in line with Joe Biden's last year in office. The federal deficit is likely to top 6% of GDP this fiscal year, in line with or higher than in Biden's last full fiscal year.

 

Second, an AI boom isn't enough. In a recent paper, economists Doug Elmendorf, Karen Dynan and Louise Sheiner examined scenarios in which AI sustainably boosted annual productivity growth by a half to a full percentage point, with differing impacts on employment. In all scenarios, the debt keeps rising as a share of GDP, albeit more slowly.

 

Third, better growth naturally leads to higher rates, which raises the interest bill on the debt. Indeed, that may be a factor now. Heady visions of AI's potential have uncorked a tidal wave of AI-linked borrowing.

 

Many on Wall Street applauded Bessent's early advocacy of a 3% of GDP deficit target, but neither Trump nor Congress signed on. Unable to change the fundamentals, Bessent is tinkering with the symptoms: a surprise boost to bond buybacks, which he characterized as an effort to influence the speed of yields' movement rather than their destination, or intervening to support the yen, whose drop he feared would roil the bond market. At a meeting with the Bank of Japan's governor, he reiterated support for a stronger yen.

 

Bessent offered little prospect of relief on those sources of inflation for which the administration is at least partly responsible. As the U.S. resumed bombing Iran, driving up the price of oil, he predicted the Strait of Hormuz would be a "worthless piece of water" in two years. He may be right, but consumers want lower gas prices today. Asked about a trade war with Canada, he ridiculed the idea that Canada was even big enough to wage such a war.

 

In fairness, headlines about yields hitting new highs were not something that should panic global leaders. The actual level of U.S. yields is in the range that prevailed from 2002 to 2006, before the global financial crisis ushered in years of abnormally low inflation and interest rates.

 

But as Ajay Rajadhyaksha of Barclays explains, there are several reasons to worry. He said a key driver of the yield run-up is that investors think short-term interest rates will be higher sustainably in the future. If so, the Fed's current interest rate setting of 3.6% isn't particularly high; it might be the new normal.

 

Also contributing: a relentless rise in government debt. This has made a relatively modest contribution to yields so far. "The market has not yet demanded a meaningful fiscal risk premium," Rajadhyaksha wrote. "We suspect it eventually will."

 

At future summits, G-20 leaders may not be able to ignore the bond market as easily as they did this year.” [1]

 

1. U.S. News -- Capital Account: Bond Market Gives World Leaders an 'F'. Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 03 Sep 2026: A2.