For more than a decade, governments borrowed as if money were almost free. Rock bottom interest rates after the 2008 financial crisis, and again during the pandemic, let finance ministries pile up debt without worrying much about what it would cost to carry. That era is now over, and the bill is starting to arrive.

On October 1, the yield on the 10-year US Treasury hit 5.34%, its highest level since 2002. The same day, Britain’s 30-year borrowing cost climbed above 6% for the first time since 1998, and France’s 10-year yield reached a 24-year high. Even in Japan, for years the anchor of cheap global money, the 10-year yield touched 3% in early September for the first time since 1996.

Together, these moves amount to a broad repricing of government debt. They come as governments owe more than ever, and as a large share of that debt needs refinancing in the next few years.

A mountain of debt

UNCTAD placed global public debt at $102 trillion in 2024. The IMF expects it to reach 100% of global GDP by 2029, equal to the world’s entire annual output, and a year sooner than it had previously forecasted.

Despite this, borrowing keeps climbing. The OECD projects that governments and companies will borrow a record $29 trillion this year. Government bond issuance in OECD countries alone is expected to reach a record $18 trillion, up from $12 trillion in 2022.

The refinancing trap

Debt this large was easy to carry while money was nearly free. Most government bonds pay a fixed interest rate set on the day they are sold, so a government that borrowed $1 billion at 1% paid about $10 million a year in interest, but the trouble is that bonds do not last forever. As the ones sold during the low-rate years mature, each must be replaced with a new bond at today’s rates. At 5%, that same $1 billion costs $50 million a year. Only part of the debt comes due in any given year, so the cost of the old debt resets a little higher every year.

To hold down interest costs, governments have been borrowing over shorter periods. Last year, the share of government bonds issued with maturities over 10 years hit its lowest level since 2009, according to the OECD. The catch is that they have to come back to the market more often. In the United States, 33% of outstanding Treasury debt was set to mature within 12 months, according to the Government Accountability Office, and the Treasury had to refinance $9.7 trillion of maturing securities in fiscal 2026, which ended in September. The average interest rate on Treasury securities had already climbed to 3.4% by the end of fiscal 2025, up from 2% in 2014.

Interest bills are rising as a result. Interest payments absorb nearly 3% of global GDP, up from 2% four years ago, according to the Committee for a Responsible Federal Budget. In the United States, net interest on federal debt topped $1 trillion for the first time in fiscal 2025.

Japan is feeling the same squeeze. Its debt is more than 200% of GDP and its budget for this fiscal year assumed a 3% long-term rate to estimate what it would pay in interest, a level the benchmark 10-year yield reached on September 1. Any further rise pushes Japan’s interest costs above what the budget planned for.

The pressure on rates

There are good reasons to think relief won’t come quickly. Inflation is one of them. The war with Iran has kept oil expensive, and in late September Brent crude was back above $100 a barrel. Earlier that month, the Federal Reserve raised rates for the first time in more than three years while signaling another hike could follow. Other central banks are moving the same way. The European Central Bank raised its deposit rate to 2.5% on September 10, and a week later the Bank of Japan lifted its policy rate to 1.25%, the highest since 1995.

Governments are also competing with Big Tech for capital. Nine major technology companies, known as “hyperscalers,” raised $122 billion from bond markets last year, and they are projected to spend $4.1 trillion on capital projects between 2026 and 2030. OECD Secretary-General Mathias Cormann warned that “debt-servicing costs are increasing, and AI-related financing needs are growing sharply.” 

Who holds government debt is changing too. Central banks, still the largest domestic holders in many OECD countries, have been shrinking their balance sheets. That leaves governments more dependent on what the OECD calls “price-sensitive investors, such as hedge funds, households and certain institutional investors,” a shift it says “has the potential to increase market volatility.”

Not everyone expects the pressure to last. A breakthrough in US-Iran talks could bring oil prices down, and higher yields could slow growth enough to pull rates lower again. Some governments are also pushing back against the gloom. “France’s signature is solid,” French Finance Minister Roland Lescure said as his country’s borrowing costs rose. His government’s 2027 budget seeks €43 billion in savings to cut the deficit from 5.4% of GDP this year to 5% next year.

The cost to budgets

Interest increasingly competes with everything else in national budgets, in rich and poor countries alike. France’s public debt stands at a postwar high of 119% of GDP, and the government plans to borrow a record €340 billion next year.

For poorer countries, the trade-off is starker still. UNCTAD estimates that 3.4 billion people live in countries that spend more on interest than on health or education, and that developing countries paid a record $921 billion in interest in 2024.

Because US rates set the benchmark for everyone else, no country is fully shielded. The IMF estimates that when a sudden jump in US government borrowing pushes Treasury yields up by one basis point, or one-hundredth of a percentage point, rates around the world rise by 0.8 to 0.9 basis points. In plain terms, when Washington’s borrowing costs rise, other governments’ costs rise almost as much, and that feeds through to what companies and households pay on loans and mortgages.

The options ahead

Steven Feldman, chief executive of precious metals firm GBI, wrote in a recent essay for OMFIF: “There is a point in any debt spiral at which the question stops being political and becomes arithmetic.” 

The pressures behind government borrowing, from defense spending to aging populations, are not going away.

The IMF says “Credible, well-sequenced fiscal adjustment is urgently needed across all country groups.” In practice, that leaves governments with a short list of unpopular options: raise taxes, cut spending, or let inflation chip away at what they owe. None of this is easy to sell to voters, but failing to act risks letting markets force the issue.

Britain saw how quickly that can happen in September 2022, when a “mini-budget” of unfunded tax cuts sent gilt yields soaring and forced the Bank of England to step in. Within weeks, most of the measures had been reversed, and both the chancellor and the prime minister were gone.

Bond markets are less patient than voters. Each time a government comes back to borrow, investors name their price, and lately they have been asking for more.