For two years, arguments about government debt were mostly American arguments. That has ended. The strain is now showing up in France, Britain, Italy and Japan, and in several places it is showing up faster than it is here.
Start with the size of the thing. Total global debt has passed $350 trillion, according to the Institute of International Finance. That is about 305% of everything the world produces in a year.
Now the flow. Advanced economies will issue roughly $18 trillion of new debt this year, the OECD reckons. Somebody has to buy all of it.
The price of a doubtful borrower
Bond investors have a simple way to express doubt. They ask for a higher yield.
Since the end of June, France’s ten-year government bond yield has risen about half a percentage point. The American ten-year rose about 0.2 over the same stretch. France now pays 0.85 percentage points more than Germany to borrow for ten years — the widest that gap has been in years.
That spread — the extra yield one government pays over another — is the market’s credit opinion, published daily and free.
| Government bond pressure | Reading |
|---|---|
| France 10-year, move since end-June | +0.5 points |
| U.S. 10-year, move since end-June | +0.2 points |
| France over Germany, 10-year | +0.85 points |
| U.S. 10-year, Thursday close | 4.671% |
| U.S. 2-year, Thursday close | 4.230% |
Japan is the one to watch
Japan spent three decades as the world’s most reliable source of cheap money. Japanese savers, earning almost nothing at home, sent enormous sums abroad in search of yield.
The Bank of Japan may turn aggressive as soon as October. If money finally pays something respectable in Tokyo, some of that money goes home.
That does not require a crisis to matter. It only requires a slightly smaller crowd of buyers at every bond auction on earth.
What this means at a kitchen table
Higher government yields are not automatically bad news for a saver. They are the return you get for lending, and a ten-year Treasury at 4.671% pays far better than the same bond did five years ago.
The trouble is duration — the sensitivity of a bond’s price to a change in rates. Long bonds fall hardest when yields rise, and the world’s governments are all trying to sell long bonds into the same tired crowd.
The American thirty-year yield had already climbed from 5.09% to 5.31% before the Treasury stepped in with larger buybacks. That is the price of a government arguing with its lenders.
So our answer is unchanged and unglamorous. Take the yield in the short and intermediate part of the ladder, where you are paid decently and your principal moves gently. Use inflation-linked bonds for the long horizon. Let dividend growers, not thirty-year coupons, carry the job of raising your income over the next twenty years.
If your retirement income plan was built when the ten-year paid under 2%, this is a good week to reread it. Fifteen minutes with a statement will tell you whether the ladder still fits the weather.