Germany and other countries are borrowing on a scale rarely seen in recent years. Several German bond auctions have already attracted weak demand even at elevated yields, while financing costs are climbing sharply in the US, Britain, France and Japan.
When public debt is high, bonds become increasingly expensive and it becomes more difficult to place them on the market. Photo: Getty Images
|
Bond markets around the world have shown in recent weeks what happens when government debt rises rapidly. Much of that borrowing is financed in capital markets through bond issuance, with investors receiving interest in return.
Banks purchase government bonds at auction and resell them to clients. They are popular because they offer fixed interest payments, while bonds issued by major Western economies are generally regarded as safe investments. At maturity, the government repays the bond at face value.
Germany's recent issuance shows that weak auctions have become more common since the summer. On 8 July, the federal government offered €6bn ($7.0bn) of a new ten-year bond. Bids totalled only €4.02bn ($4.7bn).
On 19 August, another €6bn ($7.0bn) issue attracted bids of just €4.33bn ($5.1bn). The German Finance Agency's issuance results therefore show a bid-to-offer ratio of 0.7. In other words, bids amounted to only 70% of the announced volume. Bids for a 30-year bond in August also fell well short of the amount available.
Borrowing Gets More Expensive
At the same time, yields are rising, increasing the cost of government borrowing. The yield on ten-year German government bonds has climbed from -0.18% at the end of 2021 to around 3.26% in August 2026, its highest level since 2011.
Another striking feature is the large share initially retained by the Finance Agency. At the 19 August auction, it was 37.2%, compared with a long-term average of less than 20%. Some retention is necessary to give the government flexibility in the bond market and allow it to sell securities between auctions.
As the federal budget requires more borrowing, the government is bringing substantially more debt to market. For 2026, the Finance Agency planned total issuance of around €512bn ($598bn). That does not mean new debt of the same amount, as a substantial share is used to replace maturing bonds. Of the total, €318bn ($371bn) is to be raised through longer-dated federal securities in the capital market and €176bn ($206bn) through short-term securities in the money market.
Green federal securities come on top of that. They, too, are government debt. The money raised is allocated to federal climate and environmental spending. The federal government's debt stock stood at €1.84tn ($2.15tn) at the end of May 2026, up from €1.79tn ($2.09tn) at the end of 2025.
More Borrowing Ahead
The next federal budget will push financing needs even higher. For 2027, the government's draft budget envisages net borrowing of €118.7bn ($138.7bn) in the core federal budget. This refers to new debt over and above the refinancing of maturing obligations. Additional financing through special funds comes on top.
These are legally separate government funds outside the regular budget. The Special Fund for Infrastructure and Climate Neutrality is set to receive €54.9bn ($64.1bn), while a further €30bn ($35bn) is earmarked for the Bundeswehr special fund. As these funds are also financed through borrowing, the total is far higher than the net borrowing recorded in the core budget.
The Interest Bill Mounts
The consequences are increasingly visible in the federal budget. Around €30.2bn ($35.3bn) has been budgeted for interest payments in 2026. That figure is set to rise to €41.9bn ($48.9bn) in 2027, €55.2bn ($64.5bn) in 2028, €68.1bn ($79.5bn) in 2029 and €80.7bn ($94.3bn) in 2030. The government attributes the increase to the larger debt stock and rising yields on federal securities. The financial plan shows the annual interest burden more than doubling within four years.
Higher market rates do not immediately affect the entire debt stock. Their impact feeds through gradually as old bonds mature and have to be refinanced at higher rates, while additional borrowing increases the overall burden. The Federal Finance Ministry notes that securities issued during the low-interest era are progressively being replaced by higher-yielding bonds. As recently as 2021, negative yields and high issue prices made borrowing exceptionally cheap. That effect is now going into reverse.
The Same Pressure Abroad
Germany is not alone. The US Treasury expects to borrow $739bn in privately held net marketable debt in the third quarter alone. A $42bn auction of ten-year US Treasury notes on 12 August attracted bids worth 2.53 times the amount offered, but the yield reached 4.683%. At a 30-year auction the following day, the yield was 5.216%. There were enough buyers in both cases, but only at substantially higher yields.
The US Treasury is also buying back previously issued government debt to improve market liquidity and reduce the risk of large price swings in longer-dated securities.
Britain presents a similar picture. At an auction on 18 August, the government offered £4bn ($5.5bn) of a bond maturing in 2036. Bids were 3.65 times the amount offered, but the average yield was 5.155%. The Debt Management Office, which oversees government borrowing, had already responded to a structural decline in pension-fund demand for long-dated government bonds by reducing their share of the issuance programme.
France, too, continues to find buyers. At auctions on 20 August, bids for government bonds maturing by 2034 ranged from 2.69 to 3.66 times the amounts allocated. Longer-dated securities, however, reached yields of up to 4.37% in early August.
France Pays a Higher Price
France already has significantly lower credit ratings than Germany. Standard & Poor's rates the country A+, as does Fitch. Moody's assigns it Aa3 with a negative outlook. A negative outlook is not yet a downgrade, but it signals an increased risk of one.
France's ratings show how far the credit standing of a major eurozone country can fall below AAA without preventing it from borrowing. The cost is an extra one to two percentage points in yield.
Japan combines high borrowing costs with an exceptionally heavy debt burden. The International Monetary Fund expects gross government debt to reach around 204% of annual economic output in 2026. Yet its bond auctions continue to function. On 20 August, bids for 20-year government bonds totalled 2.1tn yen ($13.2bn), of which around 532bn yen ($3.3bn) was accepted. The average yield was 3.698%. At a 30-year auction in early August, it was 3.937%. Japan's Finance Ministry has budgeted 13tn yen ($81.8bn) in interest payments for the current fiscal year, compared with 10.5tn yen ($66.1bn) in the previous year's budget.
Germany's AAA Comes With a Warning
Germany still stands apart from most major Western borrowers when it comes to creditworthiness. Six international rating agencies, including Fitch, Standard & Poor's and Moody's, give Germany their highest ratings with stable outlooks. Moody's designates its top rating Aaa, while most of the others use AAA.
Standard & Poor's affirmed Germany's AAA rating on 24 April. For the first time, however, the agency also outlined a downside scenario for the country. A downgrade could follow if German economic performance fell significantly short of expectations.
One possible scenario cited by S&P is debt-financed government spending that fails to raise medium-term growth sufficiently. Unresolved structural problems could also weigh further on the country's growth prospects. It is a clear warning to the German government over its economic policy.
The US has already lost its top rating at Standard & Poor's and Fitch. Moody's also stripped the United States of its Aaa rating in May 2025. Britain is rated AA by Standard & Poor's and AA- by Fitch. France ranks lower still.
The Cost of Expansion
Government bond yields are rising worldwide. Photo: iStock/Getty Images Plus
Every additional risk premium makes it more expensive for governments to refinance old debt and fund new deficits.
Germany nevertheless enters the coming years from a comparatively strong position. Government debt stood at 63.5% of gross domestic product in 2025, far below the levels in France, the US or Japan.
At the same time, borrowing, issuance volumes and interest expenditure are rising rapidly. At some German auctions, even at higher yields, there are no longer enough acceptable bids to cover the full announced volume.
Financing new debt and the special funds is becoming harder and more expensive.
