For much of the past decade, investors fretted about the dearth of safe assets. Central banks hoovered up bonds, yields slid to record lows and governments could borrow for a generation at barely positive interest rates. That era is decisively over. Across the advanced world, long-dated yields have climbed to heights last seen before the global financial crisis. Britain’s 30-year gilt — a debt security issued to finance its spending and investments — touched 5.8% this summer, the highest since 1998. The United States’ 30-year Treasury pierced 5%. Even the once-reassuring spread between Italian and French debt narrowed as markets reappraised the fiscal standing of Europe’s second-largest economy.

The upward march of yields is often attributed to fleeting events; an unfunded budget here, a tariff ruling there. Yet the deeper story is more structural and less reassuring. Fiscal positions are weakening, political stability is in doubt, central banks are retreating from their role as price-insensitive buyers and long-term savers are rebalancing away from government paper.

The result is a world in which sovereign bonds, once the unquestioned safe asset, increasingly trade like risky credits.

Britain: haunted by Truss

The United Kingdom offers the most dramatic case. The gilt market meltdown of September 2022, triggered by former UK Prime Minister Liz Truss’s unfunded tax cuts, was thought at the time to be an aberration — a tale of poor communication and pension-fund leverage. In reality, it marked a structural shift. Investors, once inclined to give Britain the benefit of the doubt, now demand a higher premium to hold its long bonds.

Recent months illustrate this loss of confidence. Yields on 30-year gilts surged to levels last seen a quarter of a century ago, without a single dramatic budget announcement. The rise reflects doubts about fiscal sustainability under a Labor government faced with anemic growth and heavy spending pressures. Chancellor Rachel Reeves has promised discipline, but the space for maneuver is vanishingly small: raising taxes risks choking recovery, while higher borrowing invites comparisons with the Truss debacle.

Markets have not forgotten how swiftly confidence can collapse. The “doom loop” of weak demand for gilts, rising yields and still weaker demand may yet return. Britain is not on the verge of a 1976-style IMF rescue — sterling floats and its debt has long maturity — but the mere fact that economists air such comparisons shows how fragile credibility has become.

US: privilege under strain

If Britain provides a cautionary tale, the US is testing the patience of bondholders in real time. Debt held by the public already exceeds 119% of GDP. The Congressional Budget Office estimates that interest payments alone will exceed defense spending by 2028.

Treasuries still enjoy exorbitant privilege: unrivaled liquidity, the backing of the world’s reserve currency and the credibility of the Federal Reserve (or the Fed). Yet even this privilege has limits. Investors demand a larger term premium — the extra compensation for holding long-dated bonds in a world of fiscal uncertainty. In the 2010s, quantitative easing (QE) and low inflation pushed this premium close to zero; today, persistent deficits and political brinkmanship are driving it up again.

The temptation to draw parallels with Britain’s “Truss moment” is understandable. The US’s proposed fiscal packages could expand deficits by around 1.5–2% of GDP, similar in scale to the shock Britain attempted in 2022. The difference is that US debt is in dollars, its central bank is firmly independent and markets are deeper. Yet complacency invites danger. Britain shows how swiftly markets can revolt when policy appears unanchored. The US’s fiscal trajectory, coupled with polarized politics, invites similar doubt.

France and the eurozone: core no more

Across the English Channel, France is discovering the perils of losing its “core” status within the eurozone. Long viewed as being nearly as safe as Germany, French debt has come under pressure. Yields on 30-year Obligation assimilable du Trésor bonds touched 4.5% this September, the highest since the eurozone crisis that peaked in 2011–2012, while the spread over Bunds widened to levels not seen in a decade.

Politics have triggered this. French Prime Minister François Bayrou leads a fragile minority, pushing through a budget that relies on €44 billion (over $51 billion) of cuts. Investors doubt his ability to deliver, especially amid street protests and a hostile parliament. Unlike Italy, which is supported by loyal domestic savers and currently enjoys relative political stability, France relies heavily on foreign buyers. Japanese investors — once enthusiastic holders of French paper — have retreated as hedging costs rise.

It is telling that the spread between French and Italian debt has narrowed to near-record lows. Italy has long been treated as the eurozone’s weak link; today, markets view France with almost equal skepticism.

The structural undercurrents

Fiscal and political dramas explain much of the repricing, but two deeper forces amplify it. First, demographics and savings patterns are shifting. In the 2000s and 2010s, global imbalances generated a glut of savings, pushing investors toward sovereign bonds. Aging populations in Europe and Asia now draw down savings while pension funds rebalance. The Netherlands’ pension reform, one of the largest shifts of its kind, is nudging vast pools of capital out of long-dated derivatives and into equities, reducing natural demand for government paper.

Second, the era of central-bank largesse has ended. For more than a decade after the financial crisis, QE artificially depressed long yields. Today, balance-sheet reduction is the norm. The Fed, the European Central Bank (ECB), the Bank of Japan and the Bank of England are all allowing bonds to roll off. With inflation still above target, few expect them to resume large-scale purchases soon. As many economists and newspapers call it, the “QE backstop” that once underpinned bond markets has vanished.

Volatility and narrative

The bond market’s recent gyrations reflect not just fundamentals but also thin liquidity at the long end. When buyers hesitate, even modest shifts in sentiment can cause sharp swings. A weak US jobs report can send yields tumbling; political headlines can push them back up. Commentators, searching for tidy explanations, latch onto single events. But the more accurate story is cumulative: deficits, structural change and political doubt are gradually chipping away at the notion that rich-country debt is risk-free.

The old trader’s adage still applies: Yields rise when there are more sellers than buyers. The question is why buyers are now harder to find.

Beyond the cycle

It is tempting to attribute today’s rising yields to cyclical forces: sticky inflation, hawkish central banks, heavy issuance. But the deeper story is structural. The world has exited the “great moderation” in which disinflation, globalization and QE kept yields compressed. We are entering an era where fiscal arithmetic matters again, where bond vigilantes are no longer mythical and where governments must earn the confidence of investors.

That does not mean a crisis is inevitable. Advanced economies still borrow in their own currencies, with deep capital markets and strong institutions. But the cost of complacency has risen. Investors will demand a premium, and those with weaker fiscal reputations will pay more.

Policy lessons

The repricing of sovereign debt is not yet a crisis. Governments can still borrow, and yields, though higher, remain manageable. But the warning is clear: Credibility, once lost, is costly to regain. Britain learned that in 2022. France is learning it now. The US risks discovering it soon. Sanai Takaichi, the Liberal Democratic Party and new Japanese prime minister candidate, will notice that right-side fiscal populism will trigger a meltdown.

The way forward is not financial trickery but credible medium-term consolidation plans. That does not mean immediate austerity — markets can tolerate deficits if they are embedded in a growth-enhancing strategy. But it does mean clarity, discipline and political stability.

Bond yields are more than numbers on a Bloomberg business screen. They are a referendum on trust. And once eroded, trust exacts a steep price before markets will extend it again.

The policy dilemma

For policymakers, this is an acute conundrum. Raising taxes or cutting spending risks stifling growth at a delicate moment. But ignoring the problem risks embedding higher borrowing costs permanently. In the US, this could mean interest outlays consuming a fifth of federal revenues within a decade. In Britain, it could force renewed austerity or inflationary finance.

In Europe, it could reopen questions of fiscal sovereignty and ECB credibility. The more lasting consequence is that fiscal space is shrinking, just as geopolitical and demographic demands expand it. Defense spending, climate investment and aging populations all require resources. If bond markets will no longer finance them cheaply, societies must choose: higher taxes, reduced consumption or higher inflation. None of these options are politically easy.

What we observe now is volatility; the more consequential fiscal and structural issues are still future-facing.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.