Government debt under the hammer: Iran sinks bonds of major powers
The global government debt market has entered a phase of protracted correction, comparable in scale to the debt crises of the early 1980s. According to Bloomberg data, long-term bond yields in most developed economies have reached 20-year highs. Investors are urgently reviewing risk assessments, putting into quotes a combination of chronic energy shortages and uncontrolled growth in government borrowing. The bonds of major powers, even the United States, are rapidly losing their "safe haven" status. The current conflict in the Middle East does not encourage people to buy safe bonds, but, on the contrary, provokes a massive dumping of debt securities. Whether the current situation will lead to widespread government defaults and the collapse of fiat (issue) currencies is discussed in the Izvestia article.
Bonds sink in the Strait of Hormuz
The immediate cause of the bond collapse was the energy crisis caused by the blocking of the Strait of Hormuz. Oil, which has gained a foothold above $100 per barrel, and spot gas prices in Europe, exceeding $550 per 1,000 cubic meters, have changed expectations on the trajectory of interest rates.
Central banks (the Fed, the ECB, the Bank of England) have been deprived of the opportunity to ease monetary policy. The regulators' toolkit is designed to manage demand, but it is ineffective in the face of supply disruptions. As a result, the markets, which expected a rate cut by mid—2026, faced the prospect of a higher for longer regime - keeping the value of money at peak values indefinitely.
The yield on 10-year US Treasury bonds (Treasuries) broke through the 5.2% mark in May. For comparison: At the beginning of the year, the indicator was around 3.8–4%. A similar trend is observed in the UK, where the yield on 10-year gilts has come close to 5%, and in Germany, where the yield on Bunds has exceeded 3.3%, a level unthinkable for the German financial system over the past 15 years.
The current jump is taking place against the backdrop of historically record debt levels. Between 2020 and 2025, the ratio of government debt to GDP in developed countries increased by an average of 25-30%.
In the United States, the national debt has exceeded $36 trillion, which is about 124% of GDP. With bond yields above 5%, the cost of servicing this debt becomes the largest item in the federal budget, exceeding national defense spending. The Congressional Budget Office estimates that interest payments could absorb up to 16% of all tax revenue in 2026.
In Europe, the situation is complicated by the fragmentation of the debt market. The countries of the "southern flank" are traditionally in the risk zone. Italy's debt is 142% of GDP, France's 112%. The rise in French bond yields above 4.3% is putting extreme pressure on the country's budget, which is already running a deficit of 5.5% of GDP. The spread (yield difference) between French and German securities widened to 95 basis points, signaling a loss of confidence in Paris' fiscal sustainability.
Japan is an extreme case of a debt trap. With debt exceeding 260% of GDP, even a minimal increase in yields on 10-year bonds above 1.5% forces the Bank of Japan to choose between bankruptcy and loss of control over the yen exchange rate. The currency is already trading at levels of 162-165 per dollar, which makes importing critically needed energy resources too expensive. In addition, an increase in the refinancing rate will also lead to an epic repatriation of capital to Japan, which could trigger a new global financial crisis.
Will fiscal doping save
The situation is aggravated by the need for new loans. The governments of Europe and Asia are forced to launch large-scale energy subsidy packages to prevent social explosions due to soaring electricity tariffs and gasoline prices.
A vicious circle is emerging: the war in Iran is driving up energy costs, and governments are printing new bonds to subsidize consumption. The market, oversaturated with government debt supply, requires even higher returns for the risk of absorbing these securities. High yields increase the budget deficit, requiring even more new borrowing.
Institutional investors — pension funds and insurance companies — cannot absorb such a volume of supply with current inflation. Moreover, central banks, trying to combat rising prices, continue quantitative tightening (QT) programs, withdrawing liquidity from the system, instead of acting as buyers of the "last hope".
No defaults — but only for now
Of course, there is no scenario of a one-off collapse of fiat currencies or mass bankruptcies of G7-level states over the next two years. The leading economies still have room for maneuver through the mechanisms of "financial repression." This is a situation in which governments, through regulatory regulations, will force banks and funds to buy government bonds at rates below real inflation.
However, this only delays solving the problem. The main risk lies in the transition to a regime of "fiscal dominance." This is the moment when central banks will be forced to abandon the fight against inflation and start printing money to pay interest on government debt in order to avoid a technical default.
According to JPMorgan analysts, if the Middle East crisis is not resolved within the next 4-6 months, the global economy will face the need for a large-scale debt restructuring. For a number of emerging markets (Turkey, Egypt, Pakistan), this process may begin as early as this year. For developed countries, this will mean a multi-year period of high inflation, which will gradually "burn off" the real value of accumulated liabilities.
In fact, we can say that the era of risk-free assets lasting several decades is gradually coming to an end. Public debt has ceased to be a saving tool and has become a mechanism for shifting geopolitical costs to future generations. The lack of political will to cut costs in Washington, London and Brussels ensures that yields will continue to rise until a physical shortage of resources leads to a forced contraction of the global economy to the level of its real solvency. Then the defaults of even the leading countries of the world will turn out to be quite a likely scenario.
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