The Global Debt Crisis-its Impact on Singaporeans

The major economies of the world are getting ever-deeper in debt. They are spending more than what they are collecting from corporate and personal tax revenue, exports, and investments; by a huge margin. It's not just the USA that has been profligate in spending. All the G7 countries have high Debt to GDP ratio. Countries borrow by issuing sovereign bonds. In the USA these are called Treasuries, in the UK they are Gilts, in Japan they are called JGBs, and so on. Financial institutions, insurance companies, pension funds, investment funds and central banks of other countries buy these bonds by bidding for them at auctions. The interest rate that countries pay on their debt is called the yield. Bonds can be short term , medium term or long term e.g. 5, 10, or 30 year bonds. The longer-dated the bond, the higher the uncertainty (and thus the risk) so 30-year bonds pay a higher yield. The yield is also higher for countries that are deemed riskier-due perhaps investors' perception of their fiscal policy discipline, inflation, stability of their currency or  the 'trustworthiness'  of their  political leadership. 

The chart above shows the 1-year charts of 30-year bond yields of the major economies of the world: USA, UK, Germany, France, Italy, Canada, Australia, Japan and China. I choose to use the example of the 30-year bond because these are the bonds that are the most sensitive to the risk factors I outlined above, and these are the bonds bought by other countries' central banks as reserves, by investment funds and other financial institutions.The slope of the chart shows the rate that the yield has been increasing, the steeper the slope, the higher the rate of increase. The size of China's economy, its huge reserves, as well as the property bubble that burst keep China's bond yields low and allow it to steadily grow its economy. Japan's bond yields are relatively low but its Debt to GDP ratio of 230% is way above the next highest ratio which is the USA's Debt to GDP ratio of  120%. 

At a glance you can see that bond yields are rising in all the major economies, especially in the last  three months (except for China and Australia, although Australia is dropping from a record high of 5.7 %)And you can see that the yields are highest in the USA, UK, France of over 5.0%. You can also see that although French, German and Italian bonds are all denominated in the Euro, their respective yields are siginficantly different. Investors 'trust' Gernany more than France or Italy? 

Why other countries' bond yields matters to you

• Interest rates in the USA have a positive correlation with local interest rates otherwise there would be arbitrage opportunities.
• Singapore is a small and open economy, importing most of its food and energy. Thus we will be impacted by other countries' inflation as their central banks begin printing more money, and the currrency depreciates in value. So lenders lose out!
• As the higher cost of credit rises, so will mortage rates, car loans, credit card debt and all other credit facilities.
• There is increasing risk of a meltdown event in the US stock market, which will have an impact on  financial markets all over the world. Perhaps leading to a recession such as during the crisis of 2008 or the 2019 Covid period.