Global debt has passed US$365 trillion, and the cost of carrying it is now rising faster than any government can control. For investors with money anywhere in the world, few risks matter more over at least the next two years.
Asia funds a large share of Western borrowing through its central bank reserves and its savers, and it’s now paying for that borrowing through its own bond markets and currencies.
Government borrowing costs across the G7 are higher than at any point since mid-2008, the summer before the global financial system came close to collapse. The debt those costs apply to is vastly larger today.
The Institute of International Finance, which reports global debt rose by more than $10 trillion in the first half of this year alone, blames an electoral cycle that rewards quick fixes and punishes restraint.
In 1997, Thailand, Indonesia and South Korea were made to cut spending and raise interest rates as the price of international rescue. The IIF now says the US, Japan, France and the UK face persistently large deficits and rising interest bills, problems long associated with struggling emerging market sovereigns.
None is being forced to implement remotely comparable discipline. Advanced economies paid more than $3.3 trillion last year in interest on internationally traded government debt, more than the world spent on artificial intelligence, defense or clean energy.
G7 interest bills have risen almost 85%, and with deficits already large, much of that bill is met with fresh borrowing. Higher rates enlarge interest bills, bigger bills widen deficits and wider deficits demand more issuance.
More issuance forces governments to pay higher yields to find buyers, pushing rates up again. The 10-year US Treasury yield hit 5.15% this week, its highest since 2007, and 30-year yields touched 5.45%, unseen since 2004.
At a recent five-year Treasury auction, indirect bidders, including foreign central banks, took just 54% of the sale, down from a typical 65%.
More than $30 trillion of debt across mature and emerging markets is approaching maturity, much of it issued when money was almost free. Rolling it over at the highest rates in a generation will swell interest bills for a decade or more.
In 2022, an unfunded UK budget sent gilt prices into freefall within days, forced the Bank of England into emergency intervention and brought down the then prime minister, Liz Truss. UK 10-year gilts now yield close to 5.4%, well above their level going into that episode.
The next trigger could be an oil spike, a badly received auction or a budget markets refuse to fund. Investors are underestimating the likelihood of a disorderly episode in a major sovereign bond market over the next two years, and Asia would be among the first to feel it.
Malaysia’s 10-year bond now trades at its widest discount to US Treasuries since 2007, and Indonesian and Thai spreads are close to similar extremes. When US government debt pays more than most of emerging Asia, capital has incentive to leave and regional currencies come under strain.
Policymakers across the region must choose between tightening to defend their currencies at the expense of growth, and protecting growth at the risk of capital flight.
The Reserve Bank of Australia is widely expected to hike next week, with Australian 10-year yields already at levels last seen in 2011.
Japan’s 10-year yield has reached 3.08%, the highest since 1996, even as manufacturing growth slows to a seven-month low. With public debt well above twice the size of its economy, every rise in yields bites straight into the budget.
Japan is also the largest foreign holder of US Treasuries. Higher yields at home give its insurers and pension funds a compelling reason to bring money back, and a sustained shift would strip away a pillar of demand for US and Western debt, pushing global yields higher still.
China led a $6.5 trillion surge in emerging market debt in the first half, lifting the total above $110 trillion, and its local government liabilities carry a heavy refinancing burden.
Much of emerging Asia holds deeper reserves and sturdier external positions than in 1997, yet no buffer fully offsets a world where risk-free US paper pays above 5%. Stocks and bonds sold off together this week on inflation and fiscal fears, undermining the long-held belief that government bonds reliably cushion equity losses.
Governments have learned inflation is the least painful way to shrink debt. The IIF attributes most of the 25-percentage-point fall in global debt-to-GDP since 2021 to inflation. Almost none of it came from repayment, and savers bore the cost.
Nominal yields that look generous can prove expensive in real terms. For investors in Asia, currency exposure now matters as much as asset selection, since swings against the dollar can erase years of returns in months.
Diversification across regions, currencies and asset classes, and close scrutiny of sovereign and corporate balance sheets carry more weight than at any time in the past 15 years.
Asia paid heavily for fiscal failure in 1997, and now it risks paying again for someone else’s. Investors should be asking which bond market buckles first, and whether their portfolios can withstand the shock.
Nigel Green is founder and CEO of the deVere Group.
