Under pressure: Tracking the pain in G7 government debt

By Yoruk Bahceli, Ben Welsh, Dhara Ranasinghe and Rocky Swift

LONDON/NEW YORK/TOKYO, August 20 (Reuters) - U.S. debt has topped $40 trillion for the first time, underscoring the pressures on the world's major economies to fund ever-increasing spending demands -- from ageing populations to climate change and defence.

This year, the Iran war has rekindled inflation risks, while damage wrought by Europe's increasingly volatile weather is a further strain on public finances.

No wonder perhaps that U.S. 30-year Treasury yields have risen to their highest since 2007, prompting government action to contain rising borrowing costs. Japanese borrowing costs are also near their highest in three decades and even Germany -- whose debt load is considerably lighter -- has seen its yields jump to the highest levels since 2011.

A high debt burden that brings higher borrowing costs risks hurting living standards by constraining spending and capping growth. Sovereign debt sets the benchmark for borrowing costs for companies and other loans, including household mortgages.

In a worst-case scenario, a country can hit a wall and struggle to service its debt.

This live dashboard tracks key measures of government debt in the Group of Seven (G7) advanced economies:

RISING BORROWING COSTS

Government bond yields across the G7 have surged following the COVID-19 pandemic and Russia's invasion of Ukraine, as central banks raised interest rates aggressively to tame surging inflation.

Elevated longer-term borrowing costs also reflect that investors want better returns to compensate for the risk of holding the debt.

A surge in borrowing by AI "hyperscalers" is an added pressure, as buyers demand higher returns to keep purchasing the flood of bonds hitting markets.

GOING SHORTER

The difference between shorter and long-dated government bond yields has increased sharply, making it relatively more expensive to borrow for longer.

The pressure is being intensified by fiscal concerns, central banks reducing bond holdings and some big traditional investors in long-term debt such as insurers and pension funds reducing their purchases from Japan to Britain.

To mitigate the impact, many governments have started selling bonds with shorter maturities. But that's risky too because they have to repay or refinance the debt sooner, so any rise in yields feeds faster into interest costs.

ONE-WAY TRACK?

Debt is roughly equal to or higher than economic output across the G7 bar Germany, Europe's biggest economy.

The 2008 global financial crisis, the 2011-12 euro zone debt crisis and the 2020 pandemic all increased debt levels, hurting growth. More recently, the Russia-Ukraine war, the Iran war and extreme heat have added to spending needs.

Japan has the highest level, with debt more than double its output, while even Germany, once a champion of austerity, is ramping up its borrowing. Germany's finance ministry told Reuters that Russian aggression was driving up funding needs for massive defence investment, pushing borrowing costs higher.

Ageing populations, interest bills and increased spending on defence and climate change could raise debt levels further.

INTEREST PAYMENTS

Higher post-pandemic borrowing costs are feeding into governments' interest payments.

While well below historical peaks for many countries, interest payments as a share of output have risen steadily across most G7 countries recently, notably in the United States.

In fact, interest payments across OECD countries, including the U.S., already topped defence spending in 2024.

RISING RISK

The term premium on U.S. Treasuries, a key measure of how much compensation investors demand for the risk of holding longer-term bonds, has risen since the pandemic.

That reflects anything from concern about U.S. fiscal policy to the Federal Reserve cutting its bond holdings, longer-term inflation uncertainty as well as worries about clear communication under new Federal Reserve Chairman Kevin Warsh.

It's a global phenomenon. The term premium across major OECD countries reached its highest in over 10 years, the organisation found recently.

MIND THE GAP

If there is one debt metric that has improved for some, it's how little investors are now willing to be paid to hold individual euro zone governments' bonds relative to those of Germany, which is deemed Europe's safest borrower.

The bloc has come a long way from its debt crisis when Greece needed a bailout and the risk of a euro zone breakup sent those costs surging.

Look at Italy. Once the poster child for debt woes, growing European cohesion after the pandemic, political stability and a lower budget deficit have pushed its debt risk premium to the lowest since 2008 recently.

In contrast, investors now attach greater risk to holding French bonds as a fractured political backdrop since a shock 2024 election slows efforts to rein in the budget deficit.

France, which faces a key election test next year, faces a sharp deterioration in its public finances over the ‌rest of the decade unless policymakers act quickly to curb spending, an independent report commissioned by the government said in July.

BUYER BEWARE

Japan's benchmark 10-year bond yield is on the brink of hitting 3% for the first time since the mid-1990s, highlighting how inflation, ​rising fiscal concerns and monetary policy expectations are reshaping a market long defined by low interest rates.

Japan, the most indebted country in the developed world, is in the spotlight because the spending plans of Prime Minister Sanae Takaichi have rekindled fiscal concerns. The nation's debt sales are carefully watched for signs of stress and yields have risen sharply at bond sales in recent months.

It has trimmed longer-dated bond sales in response, helping stabilise demand. Still, borrowing costs face upward pressure.

And that creates a global quandary. If more attractive yields lure Japanese money home, what has been a pillar for U.S. and European debt markets for decades could start to crumble.

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(Reporting by Yoruk Bahceli, Dhara Ranasinghe and Rocky Swift; Graphics by Ben Welsh; Editing by Elisa Martinuzzi and Alexander Smith)