Editorial. Bond blues

The surging bond yields in major developed markets across the world are sending an unmistakable message — the era of financial repression that began after the global financial crisis (GFC) is finally over. Interest costs or the cost of capital will now increasingly be based on demand and supply and not by artificial suppression of rates. Ignoring this message will come with painful consequences, both for some of the global central bankers who have failed in their inflation mandates, or governments that run persistently high fiscal deficits. While the current high 10-year government bond yields — at around 4.75 per cent in the US, 2.90 per cent in Japan, 5.15 per cent in the UK, 3.35 per cent in Germany, and 4.2 per cent in France — were the norm in pre-GFC era, the crucial difference and complication lies in the balance sheets. Since 2007 to now, the government debt-to-GDP has soared from roughly 65 per cent to 124 per cent in the US, 150 per cent to 207 per cent in Japan, 43 per cent to 102 per cent in the UK, and 66 per cent to 116 per cent in France. As borrowing costs rise due to higher yields across tenors, spiraling interest expense in itself adds to the fiscal burden. Such bond yields have been dealt with in the past, but not at current levels of debt. Compounding the problem is an erosion of institutional credibility. For example the US Fed has failed in its inflation mandate for 64 consecutive months. Governments continue to stick to expansionary fiscal policies and have increasingly resorted to interventions in the markets to address issues stemming from these — like the US treasury recently announcing plans to increase buybacks of 30-year bonds as yields surged to a 19 -year high, or the rare synchronised, coordinated intervention by the US and Japan to halt the decline in Japanese yen against the USD when it was hovering at 40-year lows against the latter. These quick-fixes cannot work when the fundamentals do not change; long-dated yields remain elevated, and currency pressures in Japan persist. Market forces are sending a strong message and authorities need to take heed. Central banks must regain credibility — much like what Paul Volcker achieved in the early 1980s — and governments must curb fiscal excess before markets force their hand, as the UK gilt crisis demonstrated in 2022. As for India, increasing cost of capital globally can affect inflows into the country as already witnessed in the case of net FII flows in the last two years. Further, reducing yield differentials between the US and India's 10-year yield, which is at around 215 basis points now, needs to be watched. While it is above the low of 165 basis points in May 2025, it can trend lower as US yields continue to increase. Lower yield differential can make Indian bonds less attractive to foreign investors given risk of currency volatility too. Reserve Bank of India will need to maintain a vigilant stance on inflation to avoid currency pressures, while remaining alert to spillover risks should developed market yields spike further. Published on September 6, 2026