Spiralling government debt has become the single biggest threat to wealth around the world, with bond markets now flashing warning signs not seen since the eurozone crisis, warns the CEO of deVere Group, one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green come as the IMF warns that global public debt, at almost 100% of GDP, has surpassed its post-World War II highs, and that a sharp rise in borrowing costs could hit asset values worldwide.
He says: “Government bonds are what everything else is priced off. Mortgages, company loans, pensions, and share valuations all start from the rate governments pay to borrow.
“When that market comes under strain, it ripples through every asset class, and right now it’s under more strain than at any point in decades. Investors who understand where the pressure is building are far better placed to protect their wealth.”
Global public debt reached 93.9% of GDP last year and is on course to hit 100% by 2029. Government interest bills have jumped from 2% of global GDP to nearly 3% in just four years.
The IMF warns the impact of a bond market shock could be severe, with higher yields marking down asset values, including AI-related stocks, and eroding the value of government bonds posted as collateral.
“The bills are already landing,” explains Nigel Green.
“Higher interest costs mean bigger deficits, bigger deficits mean more borrowing, and more borrowing pushes yields up again. Once that cycle gets going, it’s very hard to stop.”
Britain is in the firing line. Yields on 30-year gilts hit 6.036% last week, their highest since January 1998, making the UK the first G7 economy to pay that much since the height of the euro crisis in 2012. Ten-year yields are close to their highest since 2007.
Chancellor John Healey delivers his first budget on October 28.
“The UK is the one I’m most concerned about in the short term,” he says. “It has a big deficit, a heavy reliance on imported gas and a budget in two weeks that markets will pick apart line by line.
“Homeowners coming off fixed rate deals and businesses refinancing their debt will feel this directly.”
France is in even deeper trouble. Its 10-year borrowing costs hit 4.92%, the highest since 2002, and the premium over Germany widened to 152 basis points, the most since 2011. France now pays more to borrow than Italy or Greece, with debt heading for 121.7% of GDP and annual interest costs approaching €91 billion.
“France paying more to borrow than Italy or Greece would have been unthinkable a few years ago,” says the deVere CEO.
“It shows how fast confidence can disappear when politics gets in the way of fixing the numbers.”
The pressure is global. The US is running a deficit of 7% to 8% of GDP with no plan to rein it in, and the IMF projects its debt will reach 142.1% of GDP by 2031.
The 10-year Treasury yield has hit 5.34%, the highest since 2002, after its biggest quarterly surge since 1994.
Japan’s 30-year yield has hit a record 4.24%, and China’s debt is forecast to reach 126.8% of GDP.
He says: “The US, Japan, the UK and France are all seeing borrowing costs surge at the same time, and that’s what makes this so dangerous.
“In past debt scares, central banks could step in and buy bonds to calm things down.
“With oil above $100 and inflation picking up, that option’s largely off the table, and markets know it.”
The fallout could reach every corner of the market. US stocks are trading near record highs, powered by a handful of technology giants whose valuations depend on profits expected years into the future.
“Higher yields hurt far more than bondholders,” says Nigel Green. “They cut the value of shares, property and the AI stocks that have driven so much of this market.
“We saw with UK pension funds in 2022 how quickly a bond sell-off can force selling everywhere else.”
The coming weeks bring a series of major tests, including the UK budget, the Federal Reserve’s next rate decision, France’s budget battle in a fragmented parliament and a run of long-dated bond auctions in the US, UK and Japan.
“October 28 is a huge day, with the UK budget and the Fed decision landing together. If governments come forward with credible plans to get borrowing under control, some of this pressure could ease quickly.”
He concludes: “Government debt is now the number one threat to investors’ long-term wealth.
“Borrowing has been allowed to run out of control in some of the world’s biggest economies, and bond markets have started pushing back hard.
“If governments don’t get a grip on it soon, markets will do it for them, and the fallout will be felt in savings, investments, pensions and mortgages around the world.”
Author Bio
deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients. It has a network of offices around the world, more than 80,000 clients, and $14bn under advisement.