Global debt levels need no introduction to the risk on the fiscal path of many developed economies. Global public debt reached $102 trillion in 2024, with developing countries contributing $31 trillion, growing twice as fast as in developed economies since 2010. Total global debt (public and private) stood at 238% of global GDP in 2022, down slightly from its peak but still 9 percentage points above the pre-pandemic level.
The most dangerous part is that whenever
there is an unwinding effort, a new tragedy strikes the world, and the debt
levels go up again. Pandemic and now the
Trade war. The depth of impact is again isolated to country specifics, but the
global debt is again going to witness QE in other forms.
In 2025, about one-third of
countries, representing 80% of global GDP, have public debt higher than
pre-COVID levels and rising faster. Advanced economies average a 110%
debt-to-GDP ratio, while emerging and developing economies average 74%. Sudan
leads with a 252% debt-to-GDP ratio.
You will not only feel the heat of this debt on interest payments but also on ratings, economic spending and most importantly, corporate debts. The chain of action is long and very much entangled.
Despite these cuts, 30-year UK
gilt yields remain elevated—15 basis points higher year-to-date and nearly 50
basis points higher at their April peak, the highest in 27 years. This has led
to the widest gap between 2-year and 30-year gilts in nearly eight years,
reflecting a sharp steepening in the curve and increasing borrowing costs for
the government.
Central Banks Face Long-Bond Resistance
The BoE’s concerns are not
isolated. Central banks globally are becoming increasingly aware of investor
fatigue for ultra-long debt:
- In the U.S., the Federal Reserve has
nearly paused QT, maintaining only a symbolic runoff pace.
- In Japan, weak demand for super-long bonds
has forced the BoJ and Finance Ministry to reconsider issuance
plans and the central bank's role in supporting auctions.
- Shifting investor demographics and concerns about
long-term inflation and sovereign debt sustainability are also playing a
role in weakening demand for long bonds.
This comes at a time when
governments face rising fiscal demands, from defence to healthcare, yet
must operate under constrained borrowing capacity and rising debt-servicing
costs.
S&P Global warns that
sovereign defaults on foreign currency debt are likely to occur more frequently
in the coming decade due to higher debt and borrowing costs. 40% of global sovereign and corporate debt in
OECD countries and emerging markets (approximately $100 trillion in outstanding
bonds) is set to mature by 2027, with a significant portion—potentially 10–15%
annually—maturing in 2025 alone. Sovereign bond issuance in OECD countries is
expected to reach $17 trillion in 2025, up from $14 trillion in 2023, with a
portion of this reflecting maturing debt being refinanced.
Now the question is who will buy and at what
premium? The global stock of corporate bonds reached $35 trillion by end-2024,
with 38% maturing by 2027, implying ~$4–5 trillion in corporate debt maturities
in 2025 globally.
Unlike its global peers, the BoE
adopts a dual approach to QT, combining passive roll-offs with active
gilt sales—a strategy that could amplify yield curve volatility. Deputy
Governor Dave Ramsden confirmed the bank’s heightened focus on long-end
movements, though offered no specifics ahead of the QT review.
Analysts are already anticipating
changes. A recent Bank of America report forecasts the BoE could slow
its bond runoff to £60 billion in the upcoming fiscal year (from
October), compared to £100 billion in the current year. This would include
about £49 billion in maturing gilts, implying a significant pullback in
active sales.
Impact
The BoE’s remarks reflect a
broader recalibration among central banks as they confront the limits of market
tolerance for long-dated government debt. The interaction between QT, fiscal
policy, and market depth is becoming more intricate and may force monetary
authorities to adjust their balance sheet strategies sooner than planned.
As QT slows and interest rates
emerge as the primary monetary policy tool once again, central banks must
walk a tightrope: maintaining credibility in fighting inflation, while not
undermining bond market stability or crowding out private investment in
long-term securities. High debt levels strain macroeconomic stability,
especially in developing countries, where over 50 nations spend more than 10%
of their revenues on debt servicing, diverting funds from health and education.
Net interest payments in developing countries hit $921 billion in 2024, up 10%
from 2023
Conclusion:
The BoE’s nuanced pivot
underscores a broader realisation among central banks: the journey to monetary normalisation
is no longer just about reducing balance sheets, but about managing the complex
interplay between bond market functioning, fiscal sustainability, and
macroeconomic stability. As investor appetite for long bonds wanes and
structural uncertainties—from demographics to debt dynamics—cloud the outlook,
policymakers may be forced to slow QT or recalibrate its composition. The era
of balance sheet expansion may be over, but its legacy continues to shape the
decisions central banks must make in a far more fragile and debt-laden world.