“Is the Era of Low Interest Rates Over?” U.S., Japanese and European Government Bond Yields Surge in Tandem as Oil and Fiscal Risks Compound Refinancing and Defense-Spending Burdens

Government bond yields rise in tandem across the U.S., Japan and major European economies
Middle East oil shock and sovereign debt concerns drive up risk premiums
Surging investment puts fiscal management and the real economy on alert worldwide

Government bond yields across advanced economies remain at elevated levels. With geopolitical instability in the Middle East driving international oil prices sharply higher, mounting concerns over the enormous sovereign debt burdens of major economies are prompting investors to demand higher risk premiums. The economic pressure facing these countries is intensifying by the day. The United States is grappling with rising refinancing and interest expenses as well as higher borrowing costs for households and businesses, while Japan and Europe face growing strains from expansionary fiscal policy and increased defense spending, respectively.

Government Bond Yields Across Major Economies Hit Multiyear Highs

According to Investing.com on Sept. 3, with all dates based on local time, the yield on Japan’s 10-year government bond climbed as high as 3.023% intraday on Sept. 2. It was the first time the benchmark yield had exceeded 3% since 1996, roughly 30 years ago. The yield on the 10-year U.S. Treasury also surged to an intraday high of 4.818% that day, its highest level since 2023. The increase followed a hawkish message from Federal Reserve Chair Kevin Warsh, who said in a recent Jackson Hole speech that there had been “insufficient progress on price stability.” Market expectations for a September rate increase rose sharply following Warsh’s remarks.

Government bond yields in major European economies also rose markedly. The yield on France’s 10-year government bond soared to an intraday high of 4.275% on Sept. 2 and stood at 4.206% on Sept. 3, the highest level since the 2008 global financial crisis. The yield on Germany’s 10-year government bond likewise jumped to 3.395% intraday on Sept. 2, approaching its highest level since 2011, while the yield on the U.K.’s 10-year government bond climbed as high as 5.294% the same day, reaching a 19-year peak last seen in August 2007. “Investors in European financial markets have recently begun demanding from core economies such as France, the U.K. and Germany the risk premiums that were previously concentrated in fiscally vulnerable countries such as Greece, Italy and Spain,” a financial-sector official said. “The fiscal capacity and long-term borrowing burdens of these countries are beginning to be priced into the market.”

Oil Shock and Fiscal Risks Drive Yields Higher

A Middle East-driven oil shock lies behind the successive surge in advanced-economy bond yields. International oil prices have again turned volatile since the United States resumed attacks on Iran on Aug. 30. According to Reuters, Brent crude futures rose above $95 a barrel intraday on Sept. 2 after surging roughly 6% in the previous session. The increase immediately heightened investors’ concerns over inflation. If energy prices remain elevated and push up consumer prices and corporate production costs, central banks in major economies may have to prolong or intensify monetary tightening.

The enormous sovereign debt burdens of major economies are another source of anxiety in bond markets. According to U.S. Treasury data, total U.S. federal debt approached $40.047 trillion last month, of which debt held by the public, including marketable Treasury securities held by private investors and other entities, reached $32.266 trillion. In Japan, concerns over fiscal sustainability are mounting amid the government’s aggressive spending plans, while France’s government debt-to-gross domestic product (GDP) ratio has long exceeded the euro-area fiscal threshold. The yield spread between French government bonds and German government bonds, a benchmark safe-haven asset in the euro area, has also widened to its highest level since the European debt crisis. This indicates that investors are demanding a substantial risk premium for France’s fiscal vulnerabilities.

Rising Interest Costs and Household Strains in the U.S.

If the current rise in government bond yields persists, the shock is expected to spread across fiscal management and the real economy. In the United States, the enormous volume of Treasury debt requiring refinancing is the first source of pressure. According to Reuters, the U.S. Treasury issued a combined $125 billion in new three-, 10- and 30-year securities last month to refinance $96.3 billion in privately held debt that had matured. The yields set at the auctions reached 4.683% for the 10-year notes and 5.216% for the 30-year bonds, their highest levels in 19 and 25 years, respectively. As debt issued during the low-rate era begins to be replaced with higher-yielding securities, the government’s average funding cost will gradually rise. The U.S. federal government’s annual interest expense has already reached $1.1 trillion.

Household borrowing costs are also rising rapidly because U.S. mortgage rates tend to track the 10-year Treasury yield closely. According to Freddie Mac, the government-sponsored enterprise established to provide liquidity to the U.S. housing market, the average rate on a 30-year fixed-rate mortgage stood at 6.71% on Sept. 3, its highest level since July last year. The rate on a 15-year fixed-rate mortgage also increased from 5.98% the previous week to 6.04% on Sept. 3. Corporate bonds are likewise issued at Treasury yields plus a credit-risk premium, meaning that the cost of new private-sector investment and the refinancing of existing debt could rise in tandem.

Table 1. Impact of Rising Government Bond Yields by Country and Region

Policy Constraints Mount in Japan and Europe

Japan also faces a difficult policy calculus. During the fiscal 2027 budget process, the Ministry of Finance is considering raising the assumed interest rate used to calculate government bond costs from the current 3.0% to 3.8%. As a result, principal and interest payments on government debt are projected to rise 17.1% year on year to approximately $234.4 billion next fiscal year, an all-time high. If rising government bond yields add further to interest expenses, the additional burden will directly consume funds that Prime Minister Sanae Takaichi’s administration, which remains committed to expansionary fiscal policy, needs for investment in growth industries, stronger defense, household support and measures to address population aging.

For European countries, the key concern is that rising yields could erode their capacity to increase defense spending. NATO members agreed at last year’s summit to raise defense- and security-related expenditure to 5% of GDP by 2035. Real defense spending by European members and Canada increased by roughly $90 billion last year alone compared with 2024. The problem is that major economies including France, the U.K. and Italy are struggling to secure funding for additional military expenditure. Roughly one-third of the U.K.’s recently announced $20.3 billion in additional defense spending still lacks a finalized financing plan, while France’s high government debt and fiscal deficit have constrained further expenditure increases. Germany has drawn up plans to exempt some defense-related expenditure from its existing debt rule and increase annual defense spending to more than $232.4 billion by 2030, but soaring government bond yields have weakened the plan’s momentum.

The Era of the “Global Savings Glut” Is Over

As financial markets across advanced economies descend into turmoil, some analysts argue that the recent surge in interest rates reflects a fundamental shift away from the low-rate era. In the past, weak growth, subdued investment and abundant global savings restrained long-term interest rates, but the simultaneous expansion of private- and public-sector investment demand has rapidly changed the landscape. At a meeting of Group of 20 (G20) finance ministers and central bank governors in Asheville, North Carolina, on Aug. 31, Warsh described the new era as “an era of secular growth,” adding, “If I were to characterize the present moment, I would call it an era of surging global investment.”

“What I look forward to doing with all of you is examining and understanding what the growth outlook looks like across countries,” Warsh said. “I want to consider whether that growth is cyclical or structural and, of course, share with you my own view of what is happening in the United States.” Referring to the past era of the “global savings glut,” he added, “That, too, feels like a very long time ago,” and urged policymakers to “work to turn this moment into a sustained surge in investment.”