U.S. national debt has climbed past $40 trillion for the first time, highlighting a mounting fiscal challenge across the world's largest economies as they finance rising public spending pressures - from ageing populations to climate response and defence commitments.
Long-term government borrowing costs have moved up sharply this year. U.S. 30-year Treasury yields are at levels not seen since 2007, and Japanese borrowing costs are close to their highest point in three decades. Even Germany, which carries a lighter debt load than many peers, has seen its yields rise to the highest levels since 2011. These increases in sovereign yields raise the cost of servicing public debt and can feed through to corporate financing and household borrowing, including mortgages.
Why yields have climbed
Government bond yields across the G7 have surged since the COVID-19 pandemic and the onset of Russia's invasion of Ukraine, as central banks pushed interest rates higher to counter persistent inflation. Beyond central bank rate moves, investors are demanding larger returns to hold long-term sovereign paper. That demand for higher compensation reflects both elevated inflation uncertainty and concerns about fiscal sustainability.
Another factor adding pressure is a rise in borrowing by large technology companies sometimes described as AI "hyperscalers". The scale of these corporate bond purchases has increased the volume of bonds in the market, prompting buyers to seek better yields to remain active in the market.
Shortening maturities to ease near-term pressure
Faced with elevated long-term yields, many governments have been issuing more short-dated debt to reduce the immediate cost of borrowing and to meet demand from investors focused on shorter horizons. But a shift toward shorter maturities carries its own risk: those obligations need to be rolled over or repaid sooner, so any subsequent increase in yields translates more quickly into higher interest costs for the public purse.
The gap between short-term and long-term government bond yields has widened substantially, making long-term finance relatively more expensive. That dynamic is being intensified by some large traditional buyers of long-term debt - such as insurers and pension funds - cutting back purchases, and by central banks trimming their own bond holdings.
Debt relative to economic output
Across the G7, government debt is approximately equal to or greater than national output in all countries except Germany. Japan stands out with public debt exceeding twice the size of its economy. Past shocks - including the 2008 global financial crisis, the 2011-12 euro zone debt crisis and the 2020 pandemic - already pushed public debt ratios higher and weighed on growth. New pressures, such as the Russia-Ukraine war, renewed conflict in Iran and more frequent extreme heat events, have added to spending needs and fiscal strain.
Germany, once known for stringent fiscal restraint, is also increasing borrowing. The finance ministry has said that Russian aggression is driving up funding needs for substantial defence investment, which in turn is pushing borrowing costs higher.
Interest bill trends
Since the pandemic, higher borrowing costs have raised government interest payments. While these payments remain below some historical peaks for many advanced economies, they have been rising steadily as a share of output across most G7 members, with a particularly marked increase in the United States. Across OECD countries, interest payments have already surpassed defence spending in 2024.
Investor compensation for long-term risk
The term premium on U.S. Treasuries - a measure of the extra return investors demand for holding longer-term debt - has increased since the pandemic. This rise in the term premium reflects factors including concerns about fiscal policy, the Federal Reserve reducing its bond holdings, longer-term inflation uncertainty and questions about clear communication under the new Federal Reserve chairman, Kevin Warsh. The increase in term premiums is not confined to the United States; the term premium across major OECD countries has reached its highest level in more than a decade.
Shifts within Europe
One notable change within the euro area is the narrowing of spreads between many euro zone governments and Germany, which is regarded as the bloc's safest borrower. That convergence marks a significant shift from the peak stress of the euro zone debt crisis, when countries like Greece required international support and the risk of fragmentation drove borrowing costs sharply higher.
Italy, once emblematic of euro area debt worries, has benefited from greater European unity after the pandemic, improved political stability and a lower budget deficit. As a result, Italy's debt risk premium has fallen to its lowest level since 2008. By contrast, France has seen its perceived sovereign risk rise recently amid political fragmentation following a disruptive 2024 election. An independent report commissioned by the French government in July warned that, unless action is taken to curb spending, the country's public finances could deteriorate sharply over the remainder of the decade. France faces an important election test next year.
Japan in the spotlight
Japan's benchmark 10-year government bond yield is approaching 3 percent for the first time since the mid-1990s. That move highlights how inflation, fiscal concerns and monetary policy expectations are reshaping a market that has been characterised by very low interest rates for decades. Japan, with the highest debt-to-output ratio among developed economies, has seen fiscal concerns rekindled by the spending plans of Prime Minister Sanae Takaichi. The nation's bond sales are closely watched for signs of stress and yields have risen sharply at some bond offerings in recent months.
Japanese debt managers have trimmed the volume of longer-dated bond sales in response, which has helped stabilise demand in those auctions. Nonetheless, upward pressure on borrowing costs in Japan persists, and changes in yield attractiveness could have knock-on effects internationally. If relatively higher yields draw Japanese investors back to domestic markets, the long-standing role of Japanese savings as a support for U.S. and European debt markets could be weakened.
Where this leaves policymakers and markets
The combination of high sovereign debt levels, increasing long-term yields, shifting investor behaviour and rising interest payments tightens fiscal room for manoeuvre across advanced economies. Governments are balancing immediate funding needs against longer-term risks of refinancing at higher yields. Central banks and fiscal authorities will face ongoing pressure to coordinate policy responses while managing the consequences for growth and financial markets.
For markets, higher government borrowing costs establish a new benchmark for other forms of credit - potentially raising borrowing costs for companies and households. And for policymakers, an environment of elevated term premiums and higher interest bills increases the urgency of decisions about spending, taxation and debt management.
Conclusion
The G7 now faces a complex fiscal landscape. With U.S. debt above $40 trillion, multi-decade highs in long-term yields in several countries, and rising interest payments relative to national output, advanced economies are confronting competing pressures from demographic trends, climate and defence spending, and evolving investor preferences. How governments choose to manage maturity profiles, borrowing plans and fiscal priorities will be critical to how these dynamics evolve.