James Carville, a political adviser to Bill Clinton, famously ranked the bond market above being president, the pope, or a baseball player on his list of things he would want to be reborn as. “You can intimidate everybody” he argued in 1993. Fixed income investors continue to be demanding stakeholders over three decades on. But although spendthrift governments are wary, they are not taking recent warnings from their creditors seriously enough.

Early last week global bond markets sold off sharply before paring losses amid Friday’s weak US non-farm payrolls data. There were multiple triggers for the initial jump in yields. A US appeals court ruling on August 29 that said many of President Donald Trump’s tariffs were illegal put hundreds of billions of dollars of potential government revenue in jeopardy. That led lenders to demand a higher yield for holding long-term US Treasuries, which acts as a marker for global borrowing costs. The post-summer return of government debt auctions added to the turbulence.

What are bond markets telling us? Last week’s ructions are just the latest example of investors becoming increasingly skittish about government borrowing. Gross debt as a share of GDP across OECD nations has risen from just over 70 per cent in 2007 to around 110 per cent in 2023. This has been driven by responses to the global financial crisis, the Covid-19 pandemic and the energy price surge that plagued Europe in the aftermath of Russia’s full-scale invasion of Ukraine. As debt piles have risen, so have long-term government borrowing costs, making debt markets vulnerable to episodic sell-offs like last week’s. All that’s needed is a spark.