We can’t control the global forces pushing bond yields higher, but our trillion-dollar debt pile leaves us exposed anyway.
For the past 11 years, Australia has grown accustomed to cheap money. Governments at the state and federal levels have borrowed exorbitantly, with too little regard for the future.
Since mid-2015, Commonwealth gross debt alone has increased by more than $630 billion, rising more than 170% from around $370 billion to more than $1 trillion today. Much of it was borrowed at artificially and historically low rates.
Against this backdrop, Australia’s 10-year government bond yield has climbed to 5.42%, approaching levels not seen since the aftermath of the global financial crisis.
Cheap money is well and truly dead.
But Australia is far from alone. Government bonds are being sold off around the world, forcing yields higher.
In the United States, the 10-year Treasury yield has climbed to around 4.96%, while the 30-year yield has reached a near two-decade high. Persistent inflation, more than USD40 trillion in government debt and the rapidly growing capital demands of AI are all competing for the same pool of money.
Put it all together and a dangerous cycle begins to emerge. Higher interest costs create larger deficits, larger deficits require more debt issuance and that additional supply must find increasingly reluctant buyers.
The bond market appears to be broken. And the fault line running through the global bond market is Japan.
The country’s 10-year government bond yield has breached 3% for the first time since 1996 amid continued pressure on the yen. The US and Japan have tried to limit the damage through coordinated currency intervention, bringing some temporary relief, but the underlying pressure quickly returned.
That threatens one of the biggest free-money trades in modern finance: the yen carry trade. For decades, Japan was the world’s cheap money machine. Investors borrowed yen for almost nothing, shipped the capital offshore, bought higher-yielding assets elsewhere and pocketed the difference.
But pressure on the Bank of Japan to accelerate rate hikes, combined with the prospect of a stronger yen, could quickly turn a profitable strategy into one investors are rushing to get out of.
US Treasury Secretary Scott Bessent knows exactly what is at stake. Washington has every incentive to prevent Japan from becoming a forced seller of its enormous Treasury portfolio. Japan still holds more than USD1.1 trillion in US government debt and its holdings have already fallen sharply this year.
Japan does not need to dump its entire trillion-dollar Treasury portfolio to cause chaos. It only needs to stop being a reliable buyer. The US is issuing record amounts of debt just as one of its largest creditors is grappling with trouble at home.
So where does Australia fit in?
We’re the little brother of the bond world. We don’t set the global price of capital. We largely inherit it — a dangerous word in Australian tax politics these days. When global bond yields rise, we are dragged along with them.
Around 52% of Australian government bonds are held by non-residents. Once bonds held on the RBA’s balance sheet are excluded, offshore investors own roughly two-thirds of the freely traded market. Australia must therefore compete directly with US Treasuries, Japanese government bonds and other sovereign debt for global capital.
That is why Australian yields are rising faster than those of many peers. Australia can get its own house in order, but it cannot outrun a global bond sell-off. As US yields climb, so does the hurdle Australia must clear to attract global capital.
This 5.36% yield isn’t just some flashy number. It will cause havoc across the economy. It raises the hurdle rate for businesses, pushes up mortgage funding costs, makes infrastructure more expensive and eventually lands on taxpayers through higher government interest bills.
And, of course, Australia has picked the worst possible time to go through all this. Commonwealth gross debt has already crossed $1 trillion, while the Australian Office of Financial Management expects to refinance around $79 billion in maturing bonds this financial year, on top of roughly $46 billion in net new issuance.
Then the refinancing wall arrives. Billions of dollars in Covid-era debt borrowed at absurdly low rates will roll into a market demanding two, three or four times as much interest.
The interest bill is becoming a monster. Every year it grows, it devours more of the money governments should be spending on services Australians actually need.\
Australia spent more than a decade building its economy around cheap money. Governments borrowed more, asset prices inflated and businesses became accustomed to historically low financing costs.
That process is now reversing. Even if the RBA eventually brings the cash rate back down, it can’t control Japanese capital flows, US Treasury issuance or the price global investors demand to hold long-term debt.
The cash rate may fall again, but the age of cheap money is over.
