Overseas long-term bonds "breaking down everywhere"—Is the "fiscal Ponzi scheme" of developed countries no longer sustainable?

Long-term bonds in developed countries are collectively breaking down. What the market is repricing is not a fiscal shock in a single country, but the reality of high debt, high deficits, and even higher interest rates coexisting: when debt growth consistently outpaces economic growth, the so-called "fiscal Ponzi scheme" becomes increasingly difficult to roll over with low rates.

Over the past week, the yield on the UK's 30-year gilt rose to 5.82%, its highest since 1998; the yield on Japan's 30-year government bond hit 4%, the highest since this instrument was set up in 1999; the yield on the US 30-year Treasury broke above 5% for the first time since 2007; France's 10-year bond yield climbed to 3.8%, also the highest since 2007.

According to "Chasing Wind Trading Desk," Ajay Rajadhyaksha from Barclays Fixed Income, FX and Commodities Research wrote in a report on May 18: "Long-term bonds weren't just sold off last week, they've broken out of their ranges everywhere." The core judgment is, debt growth is faster than economic growth, the inflation trajectory is worsening, there is little political willingness for fiscal reform, and even if long-term bonds have fallen, there is not enough reason to extend duration.

This means that a 5% yield for the US 30-year Treasury isn't a natural ceiling. What might truly alleviate long-end rate pressure may not be immediate central bank intervention, but a string of notably weak economic data or credible fiscal path adjustments. At present, neither has appeared.

Long-term bonds break down collectively, investors retreat from duration

When a single country's bond market falls, it's usually attributable to local inflation, fiscal, political, or central bank communication issues. But this time, with the UK, Japan, the US, and France breaking down almost simultaneously, it's clear that the market is trading more than just local risks.

The commonality is clearer: major developed economies' debt-to-GDP ratios are generally above 100%, and fiscal deficits are not covered by nominal growth. The US deficit is about $2 trillion, about 6.5% of GDP, with nominal growth around 4.5% to 5%. For France, nominal GDP growth as of Q1 2026 is 2.2% year-on-year, with a deficit of around 5%. The UK deficit exceeds 4%.

This is the core contradiction pointed out by the "fiscal Ponzi scheme" concept: the government constantly relies on new debt and rolling financing to maintain expenditures, but debt expansion outpaces economic growth, while interest costs climb again. As long as this combination doesn't change, long-term bonds require higher yields to attract buyers.

New spending is adding further pressure. NATO agreed in The Hague last year to raise its defense spending target to 5% of GDP by 2035; European defense expenditure achieved double-digit percentage growth last year and may continue rising for a decade; the US government is requesting $1.5 trillion in defense appropriations for the next fiscal year from Congress. These expenditures aren't offset by corresponding cuts elsewhere.

Energy shocks add to inflation and fiscal ratchet

Debt and deficits are already fragile, and energy price assumptions further tighten policy space.

The basic assumption is that Brent crude's average price in 2026 will reach $100 per barrel, up 50% from the 2025 average. This will directly worsen inflation prospects and compress central banks' space for rate cuts, possibly even forcing rate hikes.

Higher rates mean interest payments on existing debt will continue to rise; elevated interest expenditure will make deficits even harder to reduce. This isn't a sudden, single-point crisis, but more like a fiscal ratchet: with each turn forward, government maneuvering space lessens and bond investors demand higher compensation.

Japan's 4% long bond yield changes the low-rate regime

Japan's 30-year bond yield touching 4% might not seem extreme on a US or UK scale, but it has unique significance for Japan's market. For the past 20 years, Japan's long-term rates have been near zero, with pension funds, insurance companies, and regional banks structuring their balance sheets around this environment.

The BOJ's policy rate is now at 0.75%. At the April meeting, 3 out of 9 committee members opposed the current stance; market pricing shows a 77% chance of a rate hike in June. Even if the BOJ raises rates to 1%, the real interest rate would still be substantially negative.

Japan's rise in long-term yields can be interpreted as a normalization of monetary policy: deflation ends, real wages grow, and the economy returns to a more normal state. But the issue is, for an economy whose debt is twice the size of GDP, normalizing rates may not be gentle. A 4% 30-year JGB is not just a change in yield numbers, but requires the entire low-rate financial system to be repriced.

The core dilemma for the UK and France is the political difficulty of cutting deficits

The UK Labour government has a working majority of over 150 seats in the 650-seat parliament, theoretically enabling fiscal adjustments. But last summer, even a £1.4 billion saving from winter fuel subsidy cuts triggered opposition in the Labour parliamentary party.

Political pressure keeps growing. 97 Labour MPs have demanded the Prime Minister's resignation or a timetable for stepping down. The main challenger Andy Burnham has argued fiscal policy shouldn't bow to the bond market, but later clarified he wouldn't completely ignore investors. The UK has changed Prime Ministers four times and Chancellors five times in four years. Meanwhile, bond market pricing shows the BOE still has over 60 bps of rate hike space by year-end, though Governor Bailey may prefer to wait and see.

France's dilemma isn't as eye-catching as UK gilts, but its fiscal structure is just as thorny. France has changed Prime Ministers five times in less than three years. The current government has survived two no-confidence votes in its effort to push through a budget targeting a 5% of GDP deficit, but whether this target will truly be achieved is still in doubt.

The 2023 reform raising the retirement age to 64 is under attack, and 64 is still below most Western economies. France's deficit is clearly higher than nominal GDP growth, and voters strongly punish austerity attempts; constitutional arrangements also make it easier for parliament to block spending cuts. The result is, everyone knows the deficit must fall, but no one is willing to bear the political cost to make it happen.

US 30-year Treasury breaks 5%, buyer profile is changing

The US 30-year Treasury yield breaking above 5% is the first time since 2007. The direct causes are nothing new: rising inflation, fiscal expansion, and high deficits.

The federal deficit is about $2 trillion. The Congressional Budget Office projects federal debt held by the public will climb from over 100% of GDP now to 120% by 2036. But the article notes these forecasts may still be overly optimistic.

One key variable is tariff revenue. The US effective tariff rate has dropped from a peak of 12% to 7%-8%, lower than the CBO's assumed 15%. Even if it rises to 10%, tariff revenue over the next decade would only be about 60% of the CBO's $3 trillion deficit reduction assumption. Defense spending and interest cost assumptions may also be too low.

The dollar's reserve currency status remains a structural advantage for the US, allowing it to finance at rates other debtor nations can't obtain. But this does not mean a 6.5% deficit rate is sustainable. More importantly, the marginal buyers have changed. Foreign central banks used to be stable buyers of duration assets, but after the West froze Russia's FX reserves, central bank allocations have shifted toward gold.

Last year, gold held in central bank reserves already surpassed US Treasury holdings. Japan, the largest holder of US Treasuries, now finds local market yields more attractive. The Federal Reserve is still in balance sheet reduction mode. Now buying the long-end are private investors who are more price-sensitive and demand a higher term premium.

Central banks aren't the "fuse" for long-term bonds

Debt management agencies have already reduced long-duration issuance in recent years and may continue adjusting issuance structure. But this can only ease supply pressure, not change fiscal and inflation direction.

Some in the market are discussing whether the Fed might be forced to restart large-scale asset purchases to prevent long-end yields from climbing further. Warsh has previously said about the Fed's balance sheet, "A bloated balance sheet can shrink significantly." This isn't a signal for a US version of yield curve control.

Therefore, it can't simply be defined as a bond crisis yet. But the forces driving the selloff—fiscal deterioration, increased defense spending, inflation stickiness, constrained central banks—won't disappear in a week or two.

Long-term yields reaching year-highs is not, in itself, a sufficient reason to buy duration. Unless economic data notably weakens or fiscal paths change credibly, developed-market long bonds are still trading the same issue: the low-rate financing model of the high-debt era is being repriced by the market.

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