OECD warns surging bond yields raise pressure on public finances

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OECD warns on bond yields

Highlights

Average 10-year benchmark bond yields in G7 countries reach 4 per cent in 2024, first time since 2008, raising debt-servicing costs.
OECD reports debt interest costs surpassed $2tn, or 3 per cent of GDP, last year and expects further rises, with France's interest bill up 25 per cent in 2024.
OECD forecasts G20 growth at 3.1 per cent in 2024 and 3 per cent in 2027, but projects G20 inflation at 4.1 per cent in 2026, above central bank targets.

Fiscal warning in OECD outlook

As reported by Financial Times, citing the OECD in its interim economic outlook, the Paris-based organisation says surging government bond yields are a major concern for public finances and calls on countries to rein in expenditure. It says stronger efforts are needed to contain and reallocate spending, improve public-sector efficiency and protect longer-term debt sustainability.

Stefano Scarpetta, the OECD's chief economist, says borrowing costs are rising partly because of concerns over the sustainability of public finances. He says debt-to-GDP ratios have been climbing steadily since the financial crisis, while debt-servicing costs are set to increase at a time when debt levels are already very high.

The OECD also highlights a growing number of fiscal interventions aimed at limiting energy costs for consumers and businesses, but says only about half of those measures are properly targeted. That, it says, is adding to the pressure on already stretched public finances.

Higher issuance, inflation risks and growth support

The average 10-year benchmark bond yield across G7 countries reaches 4 per cent this year for the first time since 2008. The U.S. war with Iran and the resulting jump in energy prices fuel a bond sell-off, reflecting investor concerns about higher inflation, while record government bond issuance across wealthy economies adds to the rise in debt-servicing costs.

Across the OECD, debt interest costs top $2tn, or 3 per cent of GDP, last year and are expected to rise further. In France, the interest bill is expected to increase by a quarter this year, and it already exceeds defence spending in a number of countries. Governments are also relying more on short-term debt, including an expected $1tn in U.S. Treasury bills over the coming year, which leaves borrowing costs more exposed to market rate increases.

The organisation says stronger growth could help ease the debt squeeze. It says AI-related investment and trade are helping the global economy withstand the Gulf oil shock better than expected, and forecasts G20 growth of 3.1 per cent this year and 3 per cent in 2027, led by stronger U.S. expansion and technology exports from countries including China, South Korea and Japan.

Still, inflation pressures remain elevated. The OECD forecasts inflation across G20 economies at 4.1 per cent in 2026, up from 3.4 per cent last year, before easing to 3.6 per cent in 2027, and says more than half of G20 countries currently remain above their central banks' inflation targets.

In our earlier coverage of the OECD’s interim economic outlook, we noted that AI infrastructure investment was helping cushion global growth even as the Middle East conflict-driven energy shock kept commodity prices elevated. We also highlighted the OECD’s warning that inflation risks could stay entrenched into 2027 and that rising government bond yields and renewed energy volatility remain key downside risks for the global economy.

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