It has been observed in large economies for months: yields on government bonds are rising - and sharply. Ten-year US government bonds were temporarily trading at a yield of 5.2 percent, their highest level since 2007. The phenomenon of sharply rising yields occurs in many countries.
It is evidence of a generally high capital requirement in the global economy and is not yet seen by experts as a harbinger of a possible debt crisis. The turbulence not only poses dangers for the stock markets, but also for the state - right down to individual citizens.
Why are government bond yields rising so sharply?
A strong driver is high energy prices. These increase inflation expectations and thus speculation on rising interest rates. In September, both the US Federal Reserve and the European Central Bank (ECB) raised their key interest rates and justified the steps with increased inflation. Further interest rate increases are more or less expected on the financial markets, which will further drive up the yields on government bonds.
There are also growing concerns about high levels of debt, especially in the USA. On average, America's mountain of debt is rising by over $6 billion every day and has reached $40 trillion, according to data from the US Treasury Department.
Another factor is the erratic economic and customs policy of the US government under President Donald Trump, which is fueling increasing doubts in the financial markets about the role of US government bonds as a safe investment haven. This slows down demand and increases yields, with US bonds often acting as a pacesetter for the rest of the markets. As bond yields rise in the world's largest economy, yields in other countries rise with them.
What about federal bonds?
Concerns about inflation as a result of high energy costs have also driven up yields on German government bonds significantly. Similar to US bonds, the ten-year yield has risen from around 2.9 to 3.6 percent since the beginning of the year.
The yield on federal bonds is therefore significantly below the level of American bonds. However, national debt has also become significantly more expensive in this country. For comparison: In spring 2022, the yield on ten-year federal bonds was still at zero.
If bond yields rise, taking on new debt becomes more expensive. Rating agencies recently warned of rising interest rates as debts grow. Germany can still benefit from comparatively low financing costs, Malgorzata Wegner, Germany expert at the rating agency Fitch, recently told “Welt am Sonntag”. However, higher capital market interest rates and growing borrowing are making debt servicing more expensive.
The increase in yields also has consequences for property buyers and builders in Germany, as building interest rates are based on ten-year federal bonds. Since builders and home buyers usually finance large sums of money with loans, even small surcharges can become expensive and ruin plans.
How high can yields rise?
For months, high energy costs have been one of the strongest drivers of inflation and therefore one of the most important drivers of the rise in yields. The blockage of the transport of important energy raw materials from the Persian Gulf production areas through the Strait of Hormuz has been driving up the costs of oil and gas for months, and there is still no prospect of the important strait opening. There have been repeated diplomatic efforts to resolve the conflict between the USA and Iran. However, so far they have not brought any significant progress.
In addition, the high capital requirements of many companies in the technology sector as a result of the boom in artificial intelligence and the growing debt of large economies are generating enormous demand for capital. According to Johannes Mayr, chief economist at Eyb & Wallwitz, a battle for capital is raging: “There are big forces at work here that tend to push returns upwards.”
Is there a risk of a new debt crisis in the Eurozone?
Despite the soaring, yields on federal bonds are among the lowest in Europe. In France, the second largest economy in the Eurozone, government bonds trade at significantly higher yields. Here it is 4.64 percent with a term of ten years. In Italy, the third largest economy, the return is 4.50 percent. For comparison: In the wake of the euro debt crisis, Italy had to absorb returns on debt of more than seven percent at times in 2011.
In addition, the European Central Bank now has a variety of options for combating a possible crisis, the effectiveness of which has already been proven in the last euro debt crisis. Furthermore, falling returns must be expected at any time.
Energy prices have fluctuated significantly in recent months. If an agreement is reached to open the Strait of Hormuz, oil and gas prices could quickly fall again, which would have an immediate impact on the yield on government bonds. Eyb & Wallwitz economist Mayr expects a similar reaction in the event of a crisis in the tech industry: “If the AI trend collapses, the returns would fall very quickly.”
