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Interest rates will fall in 2026. But will bond yields fall, too?

The current state of global public finances is increasingly precarious, as governments grapple with soaring debt levels and the lingering effects of the COVID-19 pandemic. According to recent analyses, many countries are facing unprecedented fiscal challenges that threaten their economic stability and recovery efforts. The International Monetary Fund (IMF) has warned that public debt is at an all-time high, with advanced economies carrying an average debt-to-GDP ratio of around 125%. This trend is particularly concerning as nations strive to balance the need for fiscal stimulus to support recovery while also addressing long-term sustainability.

One of the most striking examples of this financial strain can be seen in countries like Japan and the United States. Japan’s public debt has surged to nearly 260% of its GDP, raising alarms about the sustainability of its fiscal policies. Meanwhile, the U.S. grapples with a national debt that has exceeded $31 trillion, prompting debates over potential tax increases and spending cuts. The situation is compounded by rising interest rates, which are making debt servicing more expensive and putting additional pressure on government budgets. As inflation continues to rise globally, central banks are also faced with the challenge of tightening monetary policy without stifling economic growth.

Moreover, developing countries are not immune to these fiscal pressures. Many are experiencing a perfect storm of high debt levels, rising commodity prices, and reduced access to international financing. For instance, nations in Sub-Saharan Africa are facing increased borrowing costs, which could lead to a wave of defaults if economic conditions do not improve. The IMF has called for coordinated global efforts to address these issues, emphasizing the need for debt restructuring and international support to help vulnerable economies stabilize. In summary, the precarious state of public finances worldwide poses significant risks, underscoring the urgent need for sustainable fiscal policies and international cooperation to navigate these turbulent waters.