Global Long-Term Debt Breakdown: Financial “Ponzi Schemes” Revealed Collectively
By Claude, Deep Wave TechFlow
Original title: Global Long-Term Debt Breaks: The Fiscal Illusion in the Era of Low Interest Rates Is Collapsing
Deep Tide Guide: Long-term bonds in developed countries are collectively falling out. Market repricing is no longer a country's fiscal accident, but the reality that high debt, high deficits, and higher interest rates coexist for a long time. As debt continues to grow faster than economic growth, energy shocks reignite inflation, and the central bank's room for interest rate cuts is being compressed, the “low interest rate rolling model” that has supported financing in developed countries over the past 10 years is cracking.
Over the past week, UK 30-year Treasury yields rose to 5.82%, the highest since 1998; Japan's 30-year Treasury yield hit 4%, the highest since the breed was established in 1999; US 30-year Treasury yields rose 5% for the first time since 2007; and French 10-year Treasury yields stood at 3.8%, also returning to a high level since 2007. This sell-off has dragged down global stock markets. This week's G7 finance ministers meeting will focus on this round of bond sell-off.
According to Ajay Rajadhyaksha of Barclays's fixed income, foreign exchange and commodities research department, in a May 18 report, “It's not just that long-term bonds were sold off last week; they have broken through the range everywhere.” Its core judgment is that debt is growing faster than economic growth, the inflation path is getting worse, and there is a lack of political will for fiscal reform. Even if long-term debt has already declined, there is not enough reason to prolong it.
Priya Misra, portfolio manager at J.P. Morgan Asset Management, issued a similar warning: “Long-term interest rates rise simultaneously around the world and tend to reinforce each other, and expectations of the Federal Reserve's interest rate hike are entering the market narrative.”
The multi-treasury bond market broke down at the same time, and the “fiscal Ponzi scheme” appeared collectively
The decline in the single-country bond market can usually be attributed to domestic inflation, finance, politics, or central bank communication, but the United Kingdom, Japan, the US, and France broke down almost simultaneously, indicating that market transactions are no longer just local risks.
The commonalities are clear. Major developed economies generally have debt ratios above 100% of GDP, and fiscal deficits are not covered by nominal growth. The US deficit is about $2 trillion, equivalent to 6.5% of GDP, with a nominal increase of about 4.5% to 5%; France's nominal GDP as of the March quarter of 2026 increased 2.2% year-on-year, with a deficit of about 5%; and the UK deficit was over 4%.
This is the core contradiction pointed to by the “fiscal Ponzi scheme”. The government continues to rely on new debt and rolling financing to maintain expenses, yet the debt is expanding faster than the economic growth rate, and interest costs have become expensive again. As long as this mix does not change, long-term bonds will require higher yields to attract buyers.
New spending is still under pressure. Last year in The Hague, NATO agreed to raise the defense spending target to 5% of GDP by 2035; European defense spending achieved double-digit growth in percentage terms last year and could continue for ten years; the US government applied to Congress for $1.5 trillion in defense funding for the next fiscal year. These expenses were not offset by corresponding cuts.
The blockade of the Strait of Hormuz, the impact of oil prices ignites inflation
Debt and deficits are already fragile, and energy price shocks have further tightened policy space. The blockade of the Strait of Hormuz is a direct trigger for this round of bond market turmoil. The blockade of the world's most important oil transportation channel continues to push up oil prices and reignite inflation expectations.
Barclays's basic assumption is that the average price of Brent crude oil will reach $100 in 2026, up 50% from the average in 2025. This will directly worsen the outlook for inflation, reduce the room for the central bank to cut interest rates, and may even force the central bank to raise interest rates. Higher interest rates mean that interest payments on existing debt continue to rise, while rising interest expenses make it harder to reduce the deficit. This is more like a fiscal ratchet. For every step forward, the government has less room to maneuver, and bond investors demand higher compensation.
Priya Misra, managing director of J.P. Morgan Chase, put it bluntly: “Unless the straits are reopened, the overall interest rate range has moved upward.”
Looking at short-term data, the US 2-year yield once rose to 4.09%, the highest since February 2025; the 10-year yield was 4.58%, a nearly one-year high; overall US Treasury bonds have recorded negative returns so far this year, while the annual increase was close to 2% at the end of February.
Inflation narratives dominate the market, and term premiums are being repriced
Karen Manna, fixed income strategist and portfolio manager at Federated Hermes, judged: “We are seeing a world that is really dealing with a new wave of inflation.”
Kevin Flanagan, head of investment strategy at WisdomTree, predicts that the next consumer price index report may show an annual inflation rate of 4%, the highest level since 2023. He directly pointed out the market logic: “Inflation narratives are dominating the market, and the bond market requires higher premium compensation to hold newly issued treasury bonds.”
Last week's treasury bond auction confirmed this pricing: interest rates for 30-year auctions were as high as 5%, for the first time since 2007, but demand was lackluster; investor demand for 3-year and 10-year auctions was similarly tepid. Even if long-term bond yields have risen to a high level during the year, this in itself is not a sufficient reason to buy for a long time.
The Federal Reserve completely reverses its path, betting on moving from two interest rate cuts to a March rate hike
The inflation storm is reshaping expectations for the Federal Reserve's policy path. The environment facing incoming US Federal Reserve Chairman Kevin Warsh is far from the “easy channel” that the market described at the beginning of the year.
Traders currently regard interest rate hikes in March next year as a probable event; the probability of interest rate hikes by December is about three-quarters; at the end of February this year, the market also expects two interest rate cuts in 2026. The overall yield on US Treasury bonds is about 50 basis points or more above the level at the end of February.
Officials have stated that they will further reinforce hawkish pricing. Chicago Federal Reserve Chairman Austan Goolsbee said last week that widespread price pressure may even indicate that the economy is overheating; Federal Reserve Director Michael Barr said inflation is an “overwhelming” risk facing the economy. The minutes of the April meeting of the Federal Reserve will be released this Wednesday. The market will pay close attention to how much support the dissenting committee members received from officials.
According to the latest J.P. Morgan Chase US Treasury bond investor survey, treasury bond short positions have risen to the highest level in 13 weeks, and market bets on a further decline in the bond market have clearly heated up.
Japan's low interest rate system is being repriced
The yield on Japan's 30-year treasury bonds hit 4%, which is not extreme in the US or UK, but it doesn't mean anything to the Japanese market. Japan's long-term interest rates have been close to zero for the past 20 years, and the balance and liability structures of pensions, insurance companies, and local banks have all been built around this environment.
The Bank of Japan's policy interest rate is currently 0.75%. When interest rates were discussed in April, 3 out of 9 members opposed the current position; market pricing showed a 77% chance of interest rate hikes in June. Even if the Bank of Japan raises interest rates to 1%, the real interest rate will still be clearly negative.
The rise in Japan's long-term yield can be interpreted as a normalization of monetary policy: the end of deflation, an increase in real wages, and a return to a more normal state of the economy. The problem, however, is that in an economy whose debt is more than double GDP, interest rate normalization is not necessarily moderate. The 4% 30-year bond isn't just a change in yield figures; the entire low-interest financial system needs to be repriced.
Britain, France: Political Structure Makes Cutting Red Nearly Impossible
The UK Labour government has a majority of over 150 seats in the 650-seat parliament, and is theoretically capable of fiscal adjustment. But last summer, £1.4 billion in savings involving winter fuel subsidies alone triggered a backlash from the Labour Party's parliamentary caucus.
Political pressure continues to increase. 97 Labour MPs called for the Prime Minister to resign or give a timetable for leaving office; the main challenger, Andy Burnham, had argued that fiscal policy should not be subordinated to the bond market, and later clarified that investors would not be completely ignored. Britain has changed four terms as prime minister and five finance ministers in the past four years. Bond-market pricing shows that the Bank of England still has more than 60 basis points to raise interest rates by the end of the year, although Governor Bailey may be more willing to wait and see.
France's problems are less visible than British treasury bonds, but the fiscal structure is just as difficult. France changed five prime ministers in less than three years. The current government has survived two votes of no confidence to push for a budget with a target deficit rate of 5% of GDP. The reforms to raise the retirement age to 64 in 2023 are under attack, and 64 is still below most Western economies. France's deficit is already significantly higher than the nominal GDP growth rate. Voters will strongly punish austerity attempts, and constitutional arrangements will also make it easier for parliament to prevent spending cuts. Everyone knows that the deficit must fall, but no one wants to bear the political cost of making it lower.
The US buyer structure has changed: foreign central banks are turning to gold, private investors are asking for higher prices
The yield on US 30-year Treasury bonds rose above 5% for the first time since 2007. The direct cause is rising inflation, fiscal expansion, and high deficits, but this is nothing new; the deeper change is that marginal buyers are changing.
The US federal deficit is around $2 trillion. The Congressional Budget Office predicts that federal debt held by the public as a share of GDP will rise from over 100% today to 120% by 2036. However, this set of predictions may still be optimistic. One of the key variables is tariff revenue: the US effective tariff rate has dropped from a high of 12% to 7% to 8%, lower than the 15% assumed by the Congressional Budget Office. Even if it eventually rises to 10%, tariff revenue over the next ten years will be only 60% of the estimated $3 trillion deficit reduction. Assumptions about defense spending and interest costs are also likely to be low.
The US dollar's reserve currency status remains America's structural advantage, enabling it to finance at interest rates that are difficult for similarly indebted countries. But that doesn't mean the 6.5% deficit is sustainable. Foreign central banks used to be stable buyers of long-term assets, but after the West froze Russia's foreign exchange reserves, central bank allocations switched to gold. Last year, the share of gold in central bank reserves surpassed that of US Treasury bonds. Japan is the largest holder of US debt, and interest rates in the local market are also more attractive. The Federal Reserve is still shrinking. Long-term bonds are taken over by private investors who are more sensitive to prices and require higher maturity premiums.
The Federal Reserve is not a “fuse” for long-term debt
Debt management agencies have relatively reduced the issuance of long-term bonds in the past few years, and may continue to adjust the issuance structure in the future, but this can only ease supply pressure and not change the direction of finance and inflation.
Some people in the market are discussing whether the Federal Reserve will be forced to restart large-scale asset purchases to prevent long-term interest rates from continuing to rise. However, Warsh's previous statement on the Federal Reserve's balance sheet was that “a bloated balance sheet can be drastically reduced,” and this is not about introducing the US version of yield curve control.
Faced with continued sell-off, some investors chose to stay on hold. WisdomTree analyst Kevin Flanagan said that he currently insists on holding variable interest rate notes and maintains a low interest rate exposure, “I'd rather buy late than buy too early.” He believes that the 10-year yield of 4.5% is “more of a psychological threshold”. If the situation in the Middle East escalates again and pushes up oil prices, the yield may retest last year's high of 4.62%. Hank Smith, head of investment strategy at Haverford Trust, is more cautious. He said that whether the rise in consumer and producer prices is temporary and “will continue until 2027” is still an unresolved question.
The forces driving the sell-off are fiscal deterioration, increased defense spending, inflationary stickiness, and central bank restrictions, all of which will not disappear within a week or two. Unless economic data clearly weakens or there is a credible change in fiscal path, developed country long-term bonds are still trading the same problem: the low-interest financing model in the era of high debt is being repriced by the market.
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