Bond investors are increasingly acting as "bond vigilantes," demanding higher yields from governments due to rising debt levels and increased borrowing. This phenomenon is evident in economies like the UK, France, and the US. For example, the UK's 10-year gilt yield reached its highest since 2008 following a heavy-borrowing budget, and its spread over German 10-year bonds surpassed 2.3 percentage points, exceeding levels seen after the 2022 "mini" budget. Similarly, France's borrowing costs have risen above Greece's due to political instability, and its spread with Germany hit its highest since the Eurozone debt crisis at 0.9 percentage points in November. US 10-year Treasury yields jumped from 3.6% in September to nearly 4.7%.
This shift marks a departure from the post-global financial crisis era of low rates and quantitative easing, where central banks were dominant buyers. Now, with central banks reducing their balance sheets and China selling foreign debt, there's no longer a "price-insensitive buyer." The IMF forecasts indicate net government debt will exceed 100% of GDP in the US and France this year, and be close to that level in the UK. This high debt environment, coupled with increased issuance of longer-dated debt, has empowered investors to demand fiscal responsibility, as highlighted by Robert Dishner of Neuberger Berman and Peder Beck-Friis of Pimco.
Analysts emphasize that while borrowing isn't inherently problematic, the manner of borrowing, its presentation, and purpose are crucial to investors. The example of Liz Truss's 2022 "mini" Budget in the UK serves as a cautionary tale of how markets can punish perceived fiscal irresponsibility. Some experts suggest that while bond market discipline is real, current wobbles might be a repricing rather than a full-blown rebellion. However, concerns remain about the sheer volume of government debt, with $40 trillion in the US and $76 trillion across developed markets globally, according to James Sullivan of JPMorgan. The US Treasury's intervention to manage borrowing costs by buying longer-duration bonds and issuing shorter-dated bills is seen by some as a temporary fix that doesn't address the underlying debt burden.
