High government debt comes into focus on financial markets; 'Illusion' of cheap money is over, says bond expert

Governments worldwide are finding it significantly more expensive to raise capital through bond markets, a stark shift from the era of ultra-low interest rates. The yields on 30-year U.S. Treasury bonds surged to 5.34% earlier this week, marking their highest point since 2007, up from 4.84% at the end of last year.

This trend is not confined to the U.S. Thirty-year German Bunds have climbed to 3.78%, levels not seen since the Eurozone debt crisis in 2011. French government bonds have also seen a notable increase in yields, reaching 4.9% this week for 30-year maturities. Particularly striking is that French bonds are now yielding more than Italian ones, with 10-year French bonds at 4.11% compared to 4.07% for Italian bonds. This inversion suggests that financial markets perceive France as a riskier borrower than Italy, reflecting growing concerns about France's fiscal situation.

Financial experts attribute the rising yields to a combination of factors. High levels of government debt accumulated during years of easy money policy are a primary concern. Additionally, increased inflation expectations, substantial capital demands from U.S. tech giants, and ongoing geopolitical tensions, such as the war in Iran and high oil prices, are contributing to market unease. Daniel Farquet, head of asset management at Walliser Kantonalbank, points to the spending policies of various governments as a key driver.

The "illusion" of perpetually cheap money appears to be over, forcing governments to confront the reality of higher borrowing costs. This shift has significant implications for savers, investors, and the broader economy, potentially leading to tighter fiscal policies and increased pressure on public finances.

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The "illusion" of cheap money is over.