Why the Era of Cheap Government Debt is Over

Rising Borrowing Costs Signal a New Debt Reality

Tempatdonasi.com – Government borrowing is becoming more expensive across much of the developed world, and the pressure is especially visible in the United States. Investors are demanding higher returns for holding long-dated government bonds as public debt piles up, budget deficits remain large and confidence in fiscal restraint weakens.

A notable shift by Norway’s sovereign wealth fund has highlighted that concern. The fund, the world’s largest of its kind, is preparing to reduce its exposure to US government bonds. Its holdings stood at roughly $215 billion (€186 billion) at the end of June, and the planned reduction could total $80 billion.

The move comes as US national debt moved beyond $40 trillion in August. At the same time, yields on 30-year Treasury securities approached 5.4% during the week, their highest level since 2007. Higher yields mean Washington must offer investors more compensation to lend money for long periods, adding to the federal government’s already large interest bill.

Debt Becomes More Costly

The central question facing governments is no longer simply how much debt they can carry, but how much it will cost to refinance it. Countries with very high debt burdens are particularly exposed when market interest rates rise.

Japan, whose public debt exceeds 200% of economic output, faces a growing challenge in funding itself through capital markets. Italy, France and the United Kingdom are also dealing with higher borrowing costs. Germany remains comparatively well positioned, with debt equivalent to about 65% of gross domestic product, roughly half the US ratio.

Even Germany’s position is likely to change. Borrowing intended to strengthen the armed forces and modernize infrastructure is expected to lift its debt-to-GDP ratio toward 80% in the coming years. The contrast illustrates a broader shift: debt that appeared manageable during years of ultra-low rates can become more burdensome when yields rise.

America’s Debt Climb Accelerates

The United States now pays more than $1 trillion each year in interest, or over $3 billion daily. Since 2024, annual debt-service costs have exceeded the country’s entire military budget. That development leaves less room in the federal budget for other priorities and makes future deficits harder to reduce.

The rise has been rapid. US national debt was about $5.2 trillion in 1996. Over the following three decades, it expanded by around 650%. The total crossed $10 trillion during the 2008 financial crisis, reached $20 trillion in 2017 and passed $30 trillion in early 2022. Just four and a half years later, it breached $40 trillion.

The budget deficit is projected to approach 6% in 2026. Treasury Secretary Scott Bessent has set a goal of cutting that gap in half, but the path is complicated by the high cost of the Iran war, reduced revenue from corporate tax cuts and tariffs invalidated by the Supreme Court.

“That is a very difficult path,” Carsten Roemheld, a capital-market strategist at Fidelity International, said. “Nervousness is also rising sharply within the US administration — that is clearly evident. If this trajectory continues, it will be very difficult to sustain.”

Bond Markets Demand Credibility

Bond investors are watching not only the amount of debt issued, but also whether policymakers can convince markets that deficits will eventually narrow. This year, Bessent announced an expansion of long-term Treasury bond buybacks, increasing the volume from $2 billion to as much as $6 billion.

The measure may provide limited support to the bond market, but it is small relative to the scale of US borrowing needs. Roemheld argued that it cannot by itself hold down yields over the long term.

“The measure is, of course, far too small on its own to truly keep yields in check over the long term,” Roemheld said.

For investors, fiscal policy has become inseparable from bond pricing. A country that continues to borrow heavily while offering no convincing plan for future spending or revenue may face higher financing costs. That can create a difficult cycle: rising interest payments enlarge deficits, which then require more borrowing.

“The bond market [now] demands discipline,” Kim Crawford, global fixed-income portfolio manager at JPMorgan Asset Management, said.

Many analysts see little appetite among governments for major spending reductions, making that discipline difficult to demonstrate.

Why the United States Still Holds a Unique Position

Despite growing concern over debt, the United States remains central to global finance. Its Treasury market is exceptionally large, liquid and widely used by governments, banks, funds and corporations. For many international investors, there is no comparable market able to absorb capital on the same scale.

Europe has not yet developed a capital market that can fully rival the United States, while China and other emerging economies are neither positioned nor willing to assume that role. This limits the likelihood of an abrupt investor retreat from US assets.

“That is why I believe investors — even though they currently fear higher inflation and question the sustainability of US sovereign debt — will not turn away from the US,” Carsten Brzeski, chief economist at ING Bank, said. “At least not as long as the US economy is growing.”

Roemheld likewise sees no immediate risk of a US default. The country can issue dollars to meet its obligations. Yet that option carries its own danger: a growing reliance on money creation can weaken confidence and put pressure on the dollar if overseas investors become less willing to finance US borrowing.

Large investment needs may keep interest rates elevated. Military spending and energy-price pressures linked to the Iran war add to fiscal strain, while heavy corporate investment tied to artificial intelligence is also increasing demand for capital. The result is a more competitive market for money, where governments must compete with businesses for investor funding.

The era when major economies could borrow cheaply and indefinitely is fading. Governments may still access markets, but investors are increasingly asking for a higher price—and clearer evidence that public finances can remain sustainable.