Fitch says higher bond yields worsen debt outlook for developed economies

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Higher bond yields worsen debt outlook

Highlights

Benchmark 10-year government bond yields in the top 10 developed economies have risen by an average of 81 basis points this year, lifting overall developed-market government debt above $75 trillion.
The median 10-year yield is now 161 basis points above the average interest rate on outstanding debt, increasing difficulty in reducing or stabilising debt levels across developed markets.
France would need to cut its primary deficit to 0.4% of GDP from 2.9% and make additional fiscal adjustments if borrowing costs rise, while the U.S. is projected to run a $2.4 trillion deficit in 2024.

Debt pressures intensify as yields rise

As reported by Reuters, citing Fitch, benchmark 10-year government bond yields in the world’s 10 largest developed economies have risen by an average of 81 basis points so far this year, increasing refinancing pressure on governments already running large deficits.

The ratings agency says that rise would contribute to a nearly $4 trillion increase in overall developed-market government debt, taking the total above $75 trillion, including $68.5 trillion across the top 10 economies. It adds that the median 10-year yield across the largest developed economies is now 161 basis points above the average interest rate paid on outstanding debt, making it harder to reduce or even stabilise debt levels.

France, the U.S. and the UK face fiscal strain

France faces one of the steepest adjustment challenges, according to the report. Fitch says the country would need to cut its primary deficit to 0.4% of GDP from a projected 2.9% this year to stabilise its debt burden, while a rise in effective borrowing costs to current market yields would require a further fiscal adjustment of about 3.1% of GDP.

The U.S. is expected to run the largest general government budget deficit this year at 7.5% of GDP, or $2.4 trillion, followed by France at 5.4%, the UK at 4.8% and Germany at 3.7%. Fitch says deficits are expected to widen the most this year in Germany, by 1.1 percentage points, followed by the U.S. and Canada, both by 0.7 percentage points, while Britain is expected to record the biggest narrowing, by 0.4 percentage points.

By 2030, debt-to-GDP ratios are forecast to rise the most in France, by 12 percentage points to 128%, followed by the U.S. and Germany. Japan’s ratio is expected to fall by 11 percentage points to 185%.

Our earlier article on investors revisiting the classic 60/40 portfolio mix explained how higher government bond yields are restoring the income appeal of fixed income after years of weak returns. It outlined the yield levels that could drive a bigger shift from equities to bonds and noted that many investors are becoming more selective—adding shorter-duration and floating-rate exposures to manage rate sensitivity.

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