OECD warns surging bond yields are squeezing government finances

Long-term government borrowing costs have risen to their highest levels in years across major economies, adding to the pressure on public finances already strained by heavy debt and persistent deficits, the OECD warned on Wednesday, 23 September.

Thirty-year government bond yields are at their highest in at least 15 years in six of the Group of Seven economies, OECD Secretary-General Mathias Cormann said as the organization released its latest Interim Economic Outlook.

“Thirty-year government bond yields are at their highest in 15 years or more in six of the G7 economies,” Cormann said.

The rise makes it more expensive for governments to refinance maturing debt and issue new bonds. It is also feeding into borrowing costs elsewhere in the economy, including mortgages and corporate lending.

The move has been particularly sharp at the long end of government bond markets.

US 30-year Treasury yields have risen above 5% this year and reached levels last seen nearly two decades ago. Germany’s 30-year borrowing cost has touched its highest level since 2011, while long-dated Japanese government bond yields have climbed to records as investors seek more compensation for inflation and fiscal risks.

For governments, the timing is difficult. Debt servicing costs are rising just as spending demands are increasing in areas including defense, pensions and infrastructure.

The OECD expects the global economy to grow 2.9% in 2026 and 3% in 2027. Annualized growth slowed from 3.6% in the second half of last year to 2.6% in the first half of 2026.

The global economy has so far absorbed the energy shock caused by conflict in the Middle East better than initially feared, according to the OECD. Alternative supply routes, releases from strategic oil reserves, higher production outside the Gulf and weaker Chinese oil demand helped limit the damage.

Those cushions are becoming thinner.

“Global growth has held up better than expected, but the buffers that absorbed the energy shock are being depleted,” Cormann said. “Growth is weaker than last year and inflation is rising again.”

The OECD expects inflation across the G20 to average 4.1% in 2026 before easing to 3.6% next year. Core inflation in advanced economies is forecast to decline from 2.7% this year to 2.5% in 2027.

That persistence in inflation has helped keep long-term bond yields elevated even as some central banks have moved towards easier monetary policy.

Higher interest costs are also making fiscal consolidation harder. Governments must devote a larger share of revenue to servicing debt, reducing the money available for other spending.

The strain is greatest in countries with already high debt burdens or large deficits.

US federal debt has risen above $40 trillion, while Japan continues to carry one of the highest public debt ratios in the developed world. European governments are also under pressure to increase spending on defense and infrastructure.

Cormann urged governments to improve their fiscal positions without cutting expenditure that could raise long-term growth.

“Governments need to target support where it is most needed and get public spending on a sustainable track,” he said.

The OECD also modelled what could happen if several risks worsened at the same time.

A combination of persistently higher energy and food prices and tighter financial conditions could shave 0.7 percentage point from global growth in 2027 and add 1.1 percentage points to inflation.

The outlook also highlighted the scale of spending on artificial intelligence. Investment by technology companies and cloud-computing groups has helped support global capital expenditure and trade, but the OECD said current spending rests on expectations of substantial future earnings.

If those returns disappoint, investment could slow and asset prices could fall, tightening financial conditions.

For now, the OECD expects AI investment to remain a source of support for economic growth.

India is one of the brighter spots in the OECD outlook. The organization raised its forecast for growth in the current fiscal year to 7.1% from 6.3% in June, after the economy expanded 7.8% in FY2025-26. Growth is expected to moderate to 6.5% in FY2027-28.

The upgrade comes despite pressure from higher energy costs, tariffs and weaker purchasing power. The OECD expects those factors to slow momentum in the second half of 2026 before growth gradually recovers in 2027.

For India, the broader warning over borrowing costs is also relevant as the government balances infrastructure spending and other fiscal demands against debt-servicing costs.

Elsewhere, the OECD forecasts US growth of 2.2% in 2026 and 2.1% in 2027. China is expected to grow 4.5% this year and 4.2% next year, while the euro area is forecast to expand 1% in both years.

The rise in long-term yields leaves central banks and governments facing the same constraint. Inflation limits how quickly monetary policy can ease, while higher borrowing costs make it harder for governments to finance rising spending demands.