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U.S. government debt has surpassed $40 trillion for the first time, highlighting growing fiscal pressures as major economies face rising spending demands from ageing populations, defence, climate change and higher interest costs.
Borrowing costs have climbed sharply across Group of Seven economies since the COVID-19 pandemic and Russia’s invasion of Ukraine. More recently, the Iran war has revived inflation concerns, while extreme weather in Europe has added pressure on government budgets.
U.S. 30-year Treasury yields have reached their highest level since 2007, prompting government efforts to contain borrowing costs. Japanese bond yields are near three-decade highs, while Germany’s borrowing costs have risen to levels not seen since 2011.
Higher sovereign bond yields can weigh on economic growth because government debt serves as a benchmark for corporate loans, mortgages and other borrowing. Rising interest payments can also limit governments’ ability to fund public services and investment.
Debt levels are now roughly equal to or greater than annual economic output across most G7 countries, with Germany the main exception. Japan remains the most indebted major developed economy, carrying government debt exceeding twice its economic output.
Governments have increasingly shifted toward shorter-term bond issuance to reduce immediate long-term borrowing costs. However, shorter maturities create refinancing risks because debt must be rolled over more frequently, allowing higher market rates to feed into interest expenses faster.
Interest payments have already become a growing burden. Across OECD economies, government interest costs exceeded defence spending in 2024, while U.S. debt-servicing expenses have risen notably in recent years.
Japan is attracting particular attention as its benchmark 10-year government bond yield approaches 3%, a level unseen since the mid-1990s. Prime Minister Sanae Takaichi’s spending plans have intensified concerns about the country’s fiscal outlook.
The global impact could extend beyond Japan. Higher domestic yields may encourage Japanese investors to bring capital home, potentially weakening a long-standing source of demand for U.S. Treasuries and European government bonds and adding further upward pressure to global borrowing costs.
