10.09.2026

Will there be a crisis?

There is much worried talk of rising inflation, increased government borrowing and the necessity of pleasing the bond markets. Michael Roberts investigates

The financial media and mainstream economists are in a huge tizz. Government bond yields have risen sharply since the end of the pandemic slump to return to levels not seen since the global financial crash of 2008-09.

What is meant by a rise in ‘bond yields’? When governments and big companies borrow money, they do not ask a bank for a loan. Instead, they sell IOUs to investors and promise to repay the money with a certain interest rate. If they are set to be repaid many years later, they are called bonds.

These are bought by financial institutions, like insurance companies, pension funds, commercial banks, hedge funds, etc. Government bonds are bought mostly because they are ‘safe’, as governments are very unlikely to default on repaying them when the term of the bond ends. Investors in the bond market often buy and sell them, creating a ‘secondary’ bond price market. They do this in order to cash in early before the term of the bond is up or because they look to speculate on changes in bond prices. Bond markets have become the most important source of credit in capitalist economies and their size is much larger than stock markets.

But here is the rub. The interest rate on the bond is fixed. If it starts to look less attractive to buy (for reasons we discuss below), a buyer going into this ‘secondary market’ may be able to get a bond that was originally worth $100 when bought from the government for less than that. Any drop in price means that the new buyer will get a bigger return, percentagewise, on their money than the fixed interest rate the bond pays on its original face value. This return is called the bond’s yield. When investors sell bonds, that pushes down bond prices, just like a stock market sell-off causes stock prices to plunge. When bond prices fall, that lifts bond yields, which move in the opposite direction.

That is what is happening now in all the major government bond markets globally. Prices are falling in the secondary bond markets and so, inversely, yields are rising. Global bond yields have risen to their highest since 2008.

What are the possible causes of this rise in yields and why are investors and financial analysts making such a fuss? There are four main reasons presented by the ‘experts’: rising global inflation; high government debt; booming private capital investment increasing borrowing needs; and more uncertainty about a future economic crisis.

Let us take inflation. As I have argued in previous posts, the era of disinflation (ie, slowing inflation rates), which most advanced economies experienced during the long depression of the 2010s, is over.¹ Since the end of the pandemic slump in 2020, there has been an increase in inflation. Whereas the annual inflation rate in the advanced economies was generally below 2% during the 2010s - ie, below the target inflation rate that most central banks had set - now it is double that rate. According to the International Monetary Fund, annual global headline inflation is expected to reach 4.7% this year.

This has been mainly driven by rising costs of raw materials and transportation, started by the post‑pandemic global supply chain bottlenecks. More recently, that has been accelerated by the conflict in the Middle East - particularly Iran and the closure of the Strait of Hormuz - which has pushed oil prices 50% higher. These higher energy costs feed right back into general inflation. And it is not just energy: a whole range of key commodities have come into short supply due to the war in Iran, rising global warming and dislocation of transportation. So rising inflation is not the result of ‘excessive’ government spending or wage increases, but a supply-side issue,² compounded by slowing productivity growth which tends to raise the unit cost price of goods and services.

Historically, bond yield surges are usually due to rises in inflation. It is simple: rising prices make bond purchasers think that the nominal annual fixed interest they will get from the bond will be devalued over time by inflation, so the real return they get will fall. So bond holders will only buy bonds in the secondary market at lower prices to compensate. Also governments issuing new bonds will have to offer higher fixed rates to attract new purchasers.

In my view, this is the main cause of the current ‘bond bust’ or sharply rising yields. However, other reasons are offered. You see, many governments around the world are running large budget deficits and borrowing more money. Government debt levels are rising absolutely and even against national output. To cover these deficits and to ‘roll over’ bonds that are ending their term, governments must issue more bonds. So supply rises faster than demand by purchasers. That forces governments to offer higher interest rates, and yields in the secondary market rise.

Policy

What is worse is that central banks, in their misguided mantra that tightening monetary policy (ie, raising short-term interest rates and reducing money supply) is necessary and effective in controlling inflation, are all beginning to talk about hiking their policy interest rates over the next few months.

The European Central Bank has already started to do this, as euro zone inflation rates continue to rise. The new Chair of the US Federal Reserve, Kevin Warsh, who was appointed by Trump to cut interest rates, is now hinting that they will have to rise. The Bank of Japan is also preparing to increase rates. If these hikes materialise, they will not curb inflation, but simply add to the borrowing costs of the government and so add to the level of debt, and also spread through the economy, increasing the cost of borrowing for households (mortgages) and businesses (loans).

There is even talk that some major governments may default on their debt - foreign investors in French government bonds are raising this fear. But behind this claim is really an attempt by the French government to impose further measures of austerity on its people: namely reductions in pension benefits and other social spending. Default is not going to happen. First, although government bond yields are up since 2020, they are not historically high, even in France.

Sure, the size of government debt is much higher than 20 years ago. But that is due to the state having to bail out the private sector on at least two occasions - first, in the global financial crash of 2008-09; and, second, during the pandemic slump of 2020. It is just not true that there has been ‘profligate spending’ by governments on welfare, medicare and pensions, as the ‘bond vigilantes’ and mainstream economists claim. The only profligate spending, apart from the bailouts of banks and corporates, has been on defence - combined with cutting taxes for the rich and corporations (eg, Trump’s ‘big beautiful’ budget).

The reason that public-sector debt has risen so much in the 21st century was the bailing out of the finance and private sector during the global financial crash of 2008-09, the euro debt crisis through to 2012, and the fiscal support necessary for people to get through the pandemic slump of 2020. Those were the periods when government debt ratios rocketed. In the periods in between, policies of austerity were applied (particularly cutting welfare benefits and investment in infrastructure), along with some recovery in economic growth, so debt ratios were more or less stable. Cuts in income (particularly for higher-income groups) and corporate profits taxes meant that government tax revenues have remained flat at around 35% of gross domestic product, ensuring a rise in annual deficits.

Higher government debt levels mean higher interest costs (including the interest paid on government bonds sold). In the US, the estimated annualised interest expense on US federal debt is up to a record $1.38 trillion. This is equivalent to 4.2% of US GDP, the highest percentage since 1997. Annualised interest has surged by $900 billion (nearly 200%) over the last five years, rising at an average rate of 24%. Meanwhile, in 2026, interest expense has jumped by $78 billion to $82 billion. The cost of servicing US federal debt has never been higher, but, if central banks hike interest rates, the cost of servicing the debt will rise even more.

But there will not be any bond defaults, because governments can always resort to what economists call ‘financial repression’ - a pejorative term used by those who see government intervention as ‘distorting’ bond prices. Governments and central banks can always promise to meet any debt repayments by ‘printing money’. In the 2010s, this was called ‘quantitative easing’ and it is what the European Central Bank did under Mario Draghi during the eurozone debt crisis of 2012-15. By committing to unlimited monetary arrangements (‘outright monetary transactions’, they were called), bond holders were reassured that they would get their money back. Draghi said the ECB would do “whatever it takes” to repay debt and get borrowing costs down.

Even now, borrowing costs - in, for example, France - are much lower than they might otherwise be, thanks to that threat of financial repression. And it has recently been partially used by the US government. US treasury secretary Scott Bessent has started a scheme, where the government buys back its long-term bonds by issuing short-term treasury bills. The US government has $1 trillion in ‘excess’ funds in its ‘general account’ that it could use for this.

Money supply

But such measures of financial repression have consequences. Most significant, it increases the money supply injected into the economy and that would mean a fall in the dollar, as the global supply would rise compared to other currencies. Given that the US still imports huge amounts of necessary goods, import prices would rise and spread into general inflation. Also a falling dollar would make foreign investors in US government dollar bonds less likely to buy them and thus drive up yields. Financial repression is self-defeating and a policy of desperation only in a crisis.³

But will there be a crisis? There are some who not only deny that the current rise in bond yields will lead to a crisis: they go further and argue that the rise in bond yields actually expresses a booming and successful economy! Trumpist Federal Reserve governor Steve Miran argues that the ‘fast growing’ (!) US economy and the AI boom are driving up bond yields for the right reasons - ie, increasing demand for credit to invest.

But this argument does not hold water. The differential between bond yields after inflation is deducted has steadily risen since 2020. Since the end of the pandemic, US 10-year government bond yields have opened up a gap with real 10-year yields (ie, excluding inflation) of 2.7% - a rise of 1.7% since 2020. Indeed, the real yield is currently below that in March 2023 - hardly an indicator that it is the AI boom that is driving up the cost of borrowing, rather than inflation.

It is true, as Marx explained in Capital volume 3, that in periods of expansion in the business cycle, the rate of profit on capital invested will rise, allowing interest rates to rise without squeezing net profit (the ‘profit of enterprise’). But net profit gets squeezed if interest rates continue to rise, and a crisis can eventually ensue. But that crisis will emerge in the private sector, not in the government sector, which will be used to bail out the former.

Currently, the AI boom in the US has achieved a relative expansion in profitability,⁴ so a rise in rates of interest may not trigger a crisis - unless they rise a lot more. For now, the bond bust or the apparent crisis expressed in rising bond yields mainly reflects rising inflation, along with the risk that central banks will increase the cost of borrowing by raising rates in an attempt to control it.

Michael Roberts blogs at thenextrecession.wordpress.uk