Why investors will learn to love government bonds

LONDON, Jan 2 (Reuters Breakingviews) – The phrase “ticking time bomb” is alarmingly common in discussions of public debt and deficits. Citadel Securities’ Jim Esposito was one of the many financial luminaries to reach for the explosive metaphor in 2025. With global government borrowing standing at $100 trillion, and rising sharply relative to economic output in most countries, it’s a tempting comparison.
Yet in 2026, the tone could shift. The public debt bomb didn’t detonate amid surging inflation, geopolitical shocks and record deficits. With price rises and central-bank rates now heading in a more favourable direction, investors could learn to stop worrying and love the government bond. That would imply lower state borrowing costs, and offer some breathing room to under-pressure finance ministers in Britain, France and the United States.
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In October, the International Monetary Fund forecast that the debt of advanced economies would rise from 110% of GDP in 2025 to 119% in 2030. For emerging markets, the IMF’s numbers jump from 73% to 82% over the same period. Public borrowing has generally climbed steadily in many countries since the 2008 global financial crisis, but the post-pandemic years have seen greater anxiety about a reckoning.
One flashpoint was Britain’s disastrous 2022 “mini-budget”, when then-Prime Minister Liz Truss announced 45 billion pounds ($58.9 billion) in unfunded tax cuts, prompting investors to dump UK bonds. Then, in early 2025, U.S. President Donald Trump’s mix of aggressive tariffs and tax cuts triggered a smaller but still notable selloff in American debt. More recently, France’s parliamentary deadlock and wide budget deficit unsettled markets.
In theory, bond investing should be a fairly staid affair. Fund managers ought only to buy IOUs from governments whose stream of future budget surpluses will, in today’s money, exceed the value of outstanding public debt. On the textbook view, then, there’s little scope for a change in attitudes in the coming 12 months, absent a major economic or budget reset.
In reality, however, investors also tend to use advanced-economy debt to bet on interest rates. October offered a clear glimpse of this: as markets priced in expectations of central banks in the U.S., Germany and the United Kingdom easing policy further, bond yields dropped. Tellingly, the 30-year U.S. Treasury yield, which had stayed stubbornly high between April and August, subsequently fell and moved in lockstep with shorter-term yields.
The upshot is that seemingly intractable fiscal problems quickly fade into the background when investors’ views on monetary policy shift. A key recent change is that inflation seems to be past its peak, at least excluding volatile items like energy and food. Fast-rising prices and high rates had previously discouraged pension funds and insurers from locking their money up for decades. With that dynamic seemingly over, at least outside of Japan, fixed-income assets seem poised for a comeback.
But shouldn’t investors still worry about ever rising debt-to-GDP ratios? It depends. One thing the orthodox theory misses is that a government’s local citizens often hold large amounts of public debt, while simultaneously shouldering the burden of paying the interest on those bonds through taxes. In a sense, then, a big source of the demand for debt should be permanently on solid ground: households have little reason to worry about repayment of an obligation they effectively owe themselves. As Western governments have ramped up their bond issuance, financial assets held by households have increased in lockstep, from an average of 312% of gross disposable income in 1995 to 561% in 2023, per the Organisation for Economic Co-operation and Development.
True, there can still be wobbles when bondholders panic, particularly in small open economies like Britain. But the past 15 years of large-scale central bank bond-buying offers some comfort. In countries with deep financial markets, rate-setters can print money and swap it for sovereign bonds without sending inflation into overdrive. Meanwhile, an ageing population hoping to save more for retirement should help keep demand for sovereign bonds relatively strong.
The real risk is that, regardless of the stock of debt, excessive spending can generate inflation. Western economies are running the largest deficits in history, outside of recessions and wars, and governments have shown little ability to curb them. Yet with unemployment now ticking up in many advanced economies, the risk of overheating is much lower. Interest costs should keep falling in line with central-bank rates. As long as debt worries fade, so too will pressure on officials in the UK, France and the United States to shrink their deficits.
Far from triggering a debt crisis, a slower economy with lower interest rates would likely lead people to save more and buy more bonds. Meanwhile, soaring equity valuations have left households in wealthy nations with their highest average equity allocations since 1999, according to the OECD, and historically small bond holdings. Portfolios seem due for a rebalance. Government finance ministries will be the main beneficiary.
This is a Reuters Breakingviews prediction for 2026.
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Editing by Liam Proud; Production by Oliver Taslic
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Jon Sindreu is the London-based global economics editor for Breakingviews. He was previously a reporter and a columnist for the Wall Street Journal, where he covered macroeconomics, financial markets and aviation for 11 years. He holds a master’s degree in financial journalism from City St George’s, University of London. He also holds degrees in computer science and journalism from Universitat Autònoma de Barcelona, in his natal Catalonia.