Long-term yields in four G7 countries climb to their highest in decades

Higher yields reach a government's budget when it refinances existing bonds or issues new ones to cover a deficit, and the Seoul Economic Daily notes that the burden grows if high rates persist ^[10]. The base is already large. Advanced economies paid $3.3 trillion in interest on government debt over the past year, according to the Institute of International Finance ^[8], or about $9 billion a day ^[1].

So the cost turns on how long these yields last. Britain's 6.02% was an intraday print ^[1], two basis points over the 6% line ^[4]. Part of the climb came from investors selling to limit losses ^[6]. Selling of that kind ends once the positions are closed, so if it drove most of the move, yields can fall back while deficits stay where they are. The other drivers the Seoul Economic Daily names are oil prices lifted by the prolonged war in Iran, worsening fiscal deficits and demand for funds for AI investment ^[5]. None of them ends when a position is closed.

Three paths fit the record. In the first, the loss-limiting sales run out and yields drop back before much debt rolls over, and the bill grows slowly. In the second, the Federal Reserve, which raised its policy rate last month, delivers the three to four further increases that some in the market expect, according to the Seoul Economic Daily ^[7]. Governments then refinance through a long stretch of high rates ^[10]. The third is a European credit problem with its own yardstick. France's 10-year, at 4.96% ^[4], still yields 38 basis points less than the US 10-year ^[3], yet Semafor puts France at the epicenter after a proposed budget failed to quell anxiety over its borrowing ^[13]. In Europe the signal is the spread over Germany, and Italian and Greek yields widened sharply against it ^[14]. "European bond markets are showing the first signs of broader contagion," ING economists said ^[15].

I think the second path has more support than the first, because three of the four drivers in the record have nothing to do with positioning ^[5][6]. The view is wrong if long yields retrace once the forced selling is done, with oil and deficits unchanged.

Korea shows what a government does in the meantime. Its budget proposal puts interest on treasury bonds at 35 trillion won next year, up 19.9% ^[9]. That puts this year's line near 29.2 trillion won and the increase near 5.8 trillion won ^[2]. Deputy Prime Minister Lee Hyoung-il said on the 2nd that the government would reduce bond issuance and buy back debt early if needed ^[11]. October issuance is already 5 trillion won lower, paid for with excess tax revenue ^[12]. That part of the windfall goes to borrowing less, and so it does not go to new spending. The cut removes 5 trillion won of principal once, against an interest line rising by about 5.8 trillion won a year ^[2]. The Seoul Economic Daily argues that reducing issuance alone will not ease the burden of debt that has already piled up ^[16].