Donald Trump’s “Big, Beautiful Bill” of tax and spending cuts passed through the House early this morning, despite the government’s auction of 20-year bonds the previous day causing yields to leap. This response from bond vigilantes has rumbled on into today, much like when, in the aftermath of “Liberation Day”, investors dumped US Treasury paper until Trump backed down and suspended his tariffs.

This is to say that if the government continues to spend on credit, and offers no clear path for arresting the growth of its debt, investors will demand ever higher interest rates on the money they lend to it. That could risk locking in a spiral of rising debt costs which ultimately chokes off the economy. It’s no wonder the US stock market is floundering, as its own investors question what the country’s growth prospects will be amid this kind of impasse.

As the largest and most liquid market in the world, the US will continue to set the tone for most of its peers. And what is complicating things stateside is that foreign demand, which had so long been resilient, has recently begun to soften. As global investors reconsider the safety of US assets, they have been holding off making purchases, the result being not only rising bond yields and a flat stock market but also a falling dollar. Yet as demand drops, the supply of government paper only rises, since the US deficit shows no sign of slowing.

Nevertheless, if the American government has become a poster child for profligacy, the problem isn’t confined there. Across the developed world, interest rates on government debt are rising, and bond auctions are starting to encounter resistance from investors. On Wednesday, British and Japanese bond yields rose even faster than those in the US — the first reflecting a bad inflation report, the latter pointing to growing anxiety about the government’s fiscal management.

But the global picture is even more interesting. While the world is now awash in debt, this is not a universal problem. Western governments, fuelled by cheap credit and the huge run-up in pandemic-era debt, account for most of the planet’s borrowing. Add the private borrowing of their citizens, and their debts now account for several times their annual output.

While debt crises used to be thought of as a developing-world problem, most major governments there have since got their fiscal houses back in order. As a result, while investors have been demanding higher returns on loans to Western governments, since the start of the year bond yields in India, Nigeria, Brazil and Mexico have all been trending downwards.

It’s obvious why. With better growth prospects and more prudent budgeting — not just by governments, but by the private and household sectors too — the countries of the developing world are starting to prove more attractive as long-term prospects for bond investors. If Western politicians continue to wave off the concerns of their lenders, they will continue to receive negative responses that choke off their credit supply. It happened in Britain three years ago; will America be next?

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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