Government borrowing costs are rising across the US, Japan and Europe, and the era of cheap debt is ending. Yields on government bonds are rising in the US, Japan, and Europe. The reasons are bigger deficits, higher government spending, expensive oil, inflation worries, and growing concerns from the Iran war. Investors now expect more return for holding government debt, which is a problem for countries that have relied on cheap borrowing for a decade.
The size of the debt is another issue. According to the Institute of International Finance, total global debt hit $365 trillion in early 2026, nearly seven times what the US and China produce together in a year. Yet governments are paying more just to service this debt, while pressure to keep spending on healthcare, pensions, defense, and other basics is not going away. Now, the bond market is forcing governments to pay attention to their budgets again.
Where Bond Yields Are Rising In Japan, The US And Europe
Japan moved first. Its 10 year government bond yield reached a 30 year high around 3%. That matters because the Bank of Japan spent years holding borrowing costs down from the Bank of Japan. Since 2013, the BOJ’s massive bond buying program kept 10 year yields near zero and reduced the role of normal market price discovery. Now, the US has joined the move too. Ten year Treasury yields have reached highs not seen since 2007. Even the 30 year yield is at levels last hit 22 years ago. Traders started calling it “Black Wednesday” because the move was so sudden.
Europe has also seen a major rise in borrowing costs. France’s 10 year bonds now yield 4.6%, a level not seen since the 2008 financial crisis. Greece and Italy have seen similar increases, and Germany’s 30 year Bund yield is up to around 3.84%, its highest since 2011. John Higgins, an economist at Capital Economics, says some investors think 5% on the US 10-year could signal bigger trouble, though he does not believe that number itself is necessarily the exact trigger. Still, higher yields put more stress on the US government’s budget and hit the stock market too.
Why France’s Debt Makes It The Test Case For Europe
The main worry is what higher rates mean for countries already deep in debt. Emre Tiftik at the IIF notes that inflation has helped keep debt ratios in check, hiding some risks. But as benchmark rates move up, governments face much higher interest payments, and they still need to pay for healthcare and retiree benefits.
IMF chief Kristalina Georgieva wants governments to cut debt and make balanced budgets a priority. She also says central banks need to maintain price stability. The OECD’s latest outlook expects rising yields to pressure governments to reduce spending, improve efficiency and strengthen revenues.
France is an important example. Prime Minister Sébastien Lecornu aims to cut €54 billion ($61.8 billion) in spending by early October. France’s debt could reach a record of 119.3% of its GDP in 2026. Fitch warned last year that, without a solid plan, it could go as high as 121% by 2027. The problem is political as well as fiscal. A tough 2027 budget could threaten Lecornu’s government ahead of next spring’s presidential election, while measures such as a pension freeze are expected to face strong opposition.
But the risk is not limited to governments. Higher bond yields can affect banks as well. Fitch’s BMI unit says banks become more selective as borrowing costs rise. That means households and businesses may have a tougher time getting loans. Since their spending and investment normally make up nearly three quarters of developed countries’ economies, a credit tightening could bring down growth.
How Japan’s Yen And Treasury Holdings Add To The Risk
Japan matters in all this, for its bonds and for its currency. The yen dropped to a 40-year low, which was enough to get the US Treasury’s attention. Treasury Secretary Scott Bessent even took part in the first full-scale US-Japan yen intervention since 1998. The weaker yen matters because of the carry trade. For years, investors have borrowed yen at super low rates and invested in places with higher returns. If Japanese rates go up or the yen gets stronger, those trades lose their appeal, and investors may pull out fast.
Japan also owns more US government bonds than any other country, about $1.1 trillion. If Japanese authorities start selling US assets to help the yen, it could drive Treasury yields even higher and affect other bond markets. This all comes as Washington focuses on the strong dollar and US manufacturing. Bessent wants Tokyo to tighten up policy faster, and the Trump administration has discussed a “Mar-a-Lago Accord” mainly aimed at the Chinese yuan. But China’s economy is more than four times Japan’s, with a GDP of $20.8 trillion compared to Japan’s $4.3 trillion.
Markets are absorbing several pressures at once – costlier government borrowing, inflation, conflict in the Middle East, changes in central bank policy, and currency ups and downs. With rates rising, the bond market is back as a powerful force shaping what governments, businesses, and households have to pay to borrow money.
Also read: S&P 500 Faces Near-Term Risk As The Fed Starts A New Hiking Cycle
