The interest rates on 10-year bonds in the US, Japan, the UK, Europe and Australia have risen 0.6-0.9 percent since the start of 2026. The rises are modest and, in absolute terms, the rates are still lower than those touched pre-2007. Yet this represents a significant shift from the ultra-low rates of recent decades and exacerbates the problems of global public debt, which is at 94 percent of world GDP—more than 10 percent higher than before the pandemic—and is expected to reach 100 percent by 2030.
There are several reasons behind the rise in rates. First, inflation remains around 3-4 percent, mostly above central bank targets. It is being fed by the higher energy prices driven by the intractable West Asia conflict. Higher costs of fertilisers, industrial chemicals, plastics and materials may take till 2027 to flow through into final prices. Conflict and climate-driven disruption to food supplies and transportation costs, due to lower water levels in key transit routes, are additional factors.
Continuing economic wars will also keep prices high. Since 2016, the US has implemented tariffs, export or import bans, sanctions and asset seizures that interrupt crossborder investment and trade of goods and services. The higher costs of tariffs and countermeasures are borne by consumers, about 96 percent in the case of the US.
Emphasis on sovereignty, independence, industrial capability and employment encourages de-globalisation. The relocation of production onshore increases costs due to the loss of economies of scale and comparative advantages, increasing price pressures. The AI boom has increased the cost of processors and memory, in some cases six-fold—christened ‘RAMageddon’ or ‘RAMpocalypse’—pushing up electronic product prices further, feeding inflation.
Second, continued high issuance of government debt affects rates. The average fiscal deficit across the Organisation for Economic Co-operation and Development countries is 4.6 percent of GDP, reflecting increased defence spending, demographic pressures, tax cuts and addiction to expansionary fiscal settings.
The US has persistent budget deficits (6 percent of GDP currently), which may be worsened by measures such as the ‘Trump dividend’ entitling all American adults to $5,000 (costing $1 trillion) if the Republican party retains control of the congress and senate. Europe also faces a new debt crisis centred around BIF (Britain, Italy, France) rather than the 2011 PIIGS (Portugal, Ireland, Italy, Spain), all heavily indebted countries with stagnant economies, structural problems and growing political instability.
Third, capital flows are shifting. Japan largely finances domestically with 90 percent of its government bonds held by local investors. Others like the US and the UK are reliant on foreign capital, with overseas investors holding roughly 24 and 30 percent of government debt, respectively. But the amount of capital available may be diminishing.
Gulf petro-States, affected by the Iran war, have reduced investible funds and may need to liquidate some of their holdings. Japan’s share of the US Treasury market is 4 percent, down from 18 percent in 2004, due to slowing reserve accumulation. Chinese, Brazilian, Indian, Australian, Norwegian and Japanese investors have reduced holdings of government debt, especially their US Treasury bond exposure, reflecting lower surpluses or growing concerns about the security of their investments.
America is now increasingly dependent on volatile demand from extremely price and volatility sensitive leveraged speculators, in the form of basis trades, to purchase government issues.
Finally, confidence in policymakers’ willingness to act appropriately is low. US Treasury Secretary Scott Bessent, a former hedge fund manager, dared markets: “I have asymmetric information. I am the House now. You can bet against me if you want.” The equation of markets to casinos was troubling.
Higher for longer rates mean rising government interest expense reducing funds available for other spending. In 2025, the total debt-servicing bill of governments exceeded $2 trillion, or 3 percent of global GDP. The US government’s annual interest expense on its national debt is currently around $1.2 trillion, about 20 percent of tax revenues. The Japanese government’s borrowing costs are a quarter of spending and projected to reach 30 percent of outlays in three years.
Governments are financing this additional expense by issuing additional debt. With yields elevated, the rate paid exceeds the expected rate of nominal economic growth making the debt increasingly unsustainable. With the exception of Euro-zone members, under a fiat currency system, governments can continue to meet their obligations through their ability to monetise their debt, but this has implications for inflation, the currency, purchasing power and willingness of foreigners to invest.
The structure of government debt, in some countries, adds to the problems. Instead of extending the maturity of debt during the period of low rates, the US chose to increase its reliance on short-term borrowing to minimise borrowing costs. This means rises in rates affect interest expense quickly, and the US government must refinance around a third of its debt every year, creating a substantial risk of a disruption which would trigger a major credit or currency crisis.
The effects extend beyond governments. Higher rates will result in losses on existing holdings for investors, banks and central banks. The 2023 Silicon Valley Bank collapse was the result of losses on its holdings of long dated securities. As of end-2025, total unrealised losses on held-to-maturity and available-for-sale securities portfolios were $306 billion. Central banks globally have substantial holdings of government bonds and mortgage back securities, much of it acquired as part of quantitative easing programmes. As of early 2026, the US Fed Reserve had unrealised losses on its bond holdings of around $850 billion. Globally, the losses are four to five times that amount and would have increased with higher rates.
With total global debt of over $348 trillion (308 percent of GDP), higher government rates will flow through into borrowing costs of households and businesses forcing cutbacks in spending and investment, and the overextended will slide into financial distress. This, in turn, will result in bad debts for financial institutions who will tighten lending standards and reduce the supply of credit, the lifeblood of modern economies, slowing economic activities. In parallel, the private sector faces an ongoing war for capital with governments and risks getting squeezed out.
Higher rates have usually been a catalyst for major economic and financial adjustments. It is unlikely to be different this time.
Satyajit Das | Former banker and author of the forthcoming book, The Everything Bubble
(Views are personal)