Rising bond yields: The deadly cocktail of problems has no quick fix

Why is this a gray swan? The debt and unsustainability of government debt have been discussed practically since the beginning of the COVID-19 pandemic. Even during the pandemic, there were voices saying that the unprecedented government debt would eventually come back to haunt us and that we would have to pay the price. That moment is slowly but surely approaching.

At the same time, however, there is no real solution in sight. If we disregard Donald Trump and his bold tariff policy, that is. The American president has managed to increase government revenues, but unfortunately, spending in the US is also rising. Doubts about the sustainability of this situation are therefore justified.

Record bond yields

The biggest issue was the rise in yields on 30-year British bonds, which reached a record high of 5.93 percent. We have not seen such high yields on British bonds since 1998. The situation is truly critical.

The rise in bond yields is not only an economic problem, but also a political one. Just think of the short tenure of British Prime Minister Liz Truss. This situation poses a major challenge for the current Prime Minister, Keir Starmer. If the situation does not calm down and yields continue to rise, the debt crisis could become a major issue in the UK as well as in France.

Development of yields on 30-year UK government bonds from 1994 to today.

A similar situation also prevails in Japan and other countries, where the rise in long-term government bond yields is the main problem. The main difference between short-term and long-term bonds, apart from their maturity, lies in the factors that influence the yield curve.

While the central bank plays a key role in short-term bonds, determining their yields through interest rates, long-term bonds are primarily influenced by investors' inflation expectations. Long-term bond yields are therefore less subject to central bank control, which makes the situation serious.

Even a significant reduction in interest rates does not automatically lead to a decline in yields. The tried-and-tested recipe of low interest rates may not necessarily work.

Implementing reforms and political suicide

The situation is also complicated by the fact that rising bond yields are caused not by a single factor, but by a whole series of problems. If it were an isolated problem, the solution would be simpler. However, it is a complex set of problems that is leading most countries into a dead end. What are these problems?

First and foremost are government deficits. The public finances of countries such as the US, France, and the UK are in turmoil. Tax increases no longer have the desired effect, so over time other options will have to be sought, but these will not be popular.

Enforcing reforms in the current situation is tantamount to political suicide. Investors are aware that a return to balanced budgets is not on the agenda and are therefore demanding higher yields on bonds.

Development of government deficits in the US over the last 25 years.

Another problem is the rising cost of debt servicing. In most countries, debt servicing costs are rising year on year and are now reaching the level of the budgets of large ministries. The burden of debt is already making itself felt.

Added to this are the central banks. Political pressure to lower interest rates is felt not only in the US but also in Europe. Lower interest rates would provide relief for politicians, but central banks should not be guided by political pressure; rather, they should maintain price stability.

Lowering interest rates could increase inflationary pressure. Furthermore, low interest rates have contributed to the real estate bubble in the past and driven up real estate prices, which means that housing is unaffordable for young people and prevents them from starting a family.

The final decisive factor is inflation. Inflation in the US is not easing and has even shown an upward trend in recent months, which most economists attribute to tariff measures. Many retailers stocked up on supplies before the tariffs were introduced, so the price shock is only gradually becoming apparent.

Inflationary pressure of around three percent will continue in the US. In Europe, for example in Austria, inflation was 4.1 percent in August, twice as high as the ECB's inflation target. Inflation is far from under control, and rising inflation expectations are causing investors to demand higher interest rates on bonds. This will certainly not be the last time we write about the bond crisis.

Inflation trends in Austria over the past year.

Alibaba back in the spotlight

There was some interesting news from the corporate world this week. Alibaba's shares rose significantly. After the publication of good financial results for the second quarter of 2025, the company's shares rose by more than 19 percent.

Alibaba's share price development over the last month.

There were several reasons for this. In addition to strong financial results, China is experiencing a boom in so-called instant commerce. Thanks to a dense logistics network, large Chinese online stores deliver their shipments by express delivery.

In large cities, it is now standard for customers to wait only an hour or two, sometimes even less, for their goods. One popular example is ordering coffee via these platforms and having it delivered directly to your home.

Another factor behind the rise in share prices is Alibaba's focus on artificial intelligence, particularly in the development of cloud services. The company's cloud division recorded annual revenue growth of 26 percent. Alibaba thus confirms the trend toward a comeback for Chinese technology companies.

It appears that China's lag in the field of artificial intelligence is not as great as originally assumed and that Chinese companies could soon become serious competitors for the American technology giants.

Waiting for data from the American labor market

One of the reasons why people started talking about a bond crisis was the absence of another important issue. This week, attention is focused primarily on data from the US labor market, which will be released on Friday. If the unemployment rate rises slightly, this would be positive news for the markets, as it would confirm expectations that the US Federal Reserve (Fed) will cut interest rates in September.

If, on the other hand, unemployment falls, this could lead to confusion and uncertainty in the markets, as it would suggest that the Fed may not need to cut interest rates. The end of this week could still be very turbulent on the financial markets.