The World Is Awash with Debt — and the Bond Markets Are Getting Nervous
Pita’s perspective…
The world is awash with debt, and the world's bond markets are starting to get nervous. The so-called bond vigilantes want a higher interest return for what they perceive is a higher risk. And when the world's biggest borrower has to pay more to find buyers, interest rates everywhere feel it — including on New Zealand mortgages and farm lending.
In this article, Pita Alexander explains what a bond actually is, who owes what around the world, who has lent money to the United States, and what is pushing US bond yields higher. He finishes with what New Zealand should learn from it all.
What is a bond?
A bond is a financial loan where an investor lends money to a government, a council or a company in exchange for a regular interest payment and the return of the original capital advanced at a set date.
There are 196 countries around the world, and most have a bond market of some kind, including New Zealand.
The total world bond market is approximately US$140 trillion. It is much bigger than the world's share markets.
Who buys bonds?
Central banks
Investment funds
Exchange traded funds
Hedge funds
Insurance companies
Life insurance companies
Households and individuals
Pension funds
Foreign countries
Sovereign wealth funds
Countries with a big bond market
USA: US$49.87 trillion
China: US$16.76 trillion
Japan: US$10.44 trillion
France: US$16.33 trillion
Germany: US$6.09 trillion
United Kingdom: US$5.57 trillion
The most relevant bond of all is the USA Treasury ten-year bond.
Government debt around the world
Here is the gross government debt (in US dollars) and the gross debt to GDP ratio of some of the world's countries, as at 30 June 2026:
USA: $40.7 trillion (126% of GDP)
China: $22.3 trillion (107%)
Japan: $9.0 trillion (204%)
United Kingdom: $4.4 trillion (104%)
France: $4.3 trillion (118%)
Italy: $3.8 trillion (138%)
Germany: $3.5 trillion (66%)
India: $3.5 trillion (56%)
Canada: $2.8 trillion (111%)
Brazil: $2.5 trillion (97%)
Spain: $2.1 trillion (98%)
Mexico: $1.3 trillion (58%)
Australia: $1.1 trillion (55%)
South Korea: $1.1 trillion (52%)
Belgium: $849 billion (109%)
Poland: $745 billion (64%)
Netherlands: $839 billion (44%)
Indonesia: $839 billion (42%)
Austria: $512 billion (84%)
Russia: $507 billion (20%)
Israel: $502 billion (76%)
Argentina: $485 billion (75%)
Saudi Arabia: $446 billion (34%)
Switzerland: $442 billion (39%)
Greece: $421 billion (137%)
Turkey: $418 billion (23%)
Thailand: $387 billion (57%)
South Africa: $379 billion (79%)
Egypt: $374 billion (87%)
New Zealand: $126 billion (49%)
Australia: $690 billion (32%)
When you add in the debt also owed by households, financial institutions and corporations, the total world debt is US$365 trillion.
Who has lent US$40.7 trillion to the United States government?
American people and American institutions: $31.43 trillion (75.9%)
Foreign holders: $9.27 trillion (24.1%)
Total: $40.70 trillion (100%)
Which countries have lent money to the US government?
As at 30 June 2026, these are the foreign lenders, in US dollars. Some of these lenders will be individuals, with the country simply being their custodial location, but some are the countries' governments.
Japan: $1,120 billion
United Kingdom: $940 billion
China: $630 billion
Belgium: $480 billion
Canada: $460 billion
Cayman Islands: $450 billion
Luxembourg: $430 billion
France: $390 billion
Ireland: $350 billion
Taiwan: $300 billion
Switzerland: $280 billion
Singapore: $280 billion
Hong Kong: $260 billion
Norway: $200 billion
India: $190 billion
Brazil: $170 billion
Saudi Arabia: $140 billion
South Korea: $140 billion
United Arab Emirates: $120 billion
Israel: $110 billion
Other countries: $1,830 billion
Total foreign debt: $9.27 trillion
Meet the bond vigilantes
Almost every country has a bond market or bond lenders, and these lenders are referred to as "bond vigilantes". This is a very good name for them.
They caused a major problem for Mrs Truss in the United Kingdom several years ago, when she proposed a major capital expenditure without making it clear how it would be financed.
New Zealand's bond market
New Zealand effectively has a bond market in the government stock it issues.
As at 30 June 2026, the New Zealand government stock on issue was $212.9 billion. Another $10.5 billion of other debt brings New Zealand's gross government debt up to $223.4 billion.
Current New Zealand government stock yields
For institutional investors (presumably bigger loans):
1 year: 3.26%
2 year: 3.97%
5 year: 4.21%
10 year: 5.12%
Kiwi Bonds available to individual investors:
6 months: 3.00%
1 year: 3.25%
2 year: 3.50%
4 year: 3.75%
US bond market rates
These are the key United States bond market options as at September 2026. This data alters almost every day.
2-year Treasury note: 4.75%
3-year Treasury note: 4.82%
5-year Treasury note: 5.03%
7-year Treasury note: 4.89%
10-year Treasury note: 5.21%
30-year Treasury bond: 5.53%
The 10-year bond: the main benchmark
The USA 10-year bond tends to be the main benchmark.
10-year bond: trading at 4.20% in October 2025, and 5.21% as at 25 September 2026 (a 23.8% rise).
30-year bond: trading at 4.5% in October 2025, and 5.53% as at 25 September 2026 (a 22.66% increase).
Recently there has been a move by traders to sell the longer-term stock and buy the shorter-term stock.
Why the US bond market matters to everyone
The USA bond market is much bigger than the USA share market. The 10-year bond affects USA mortgage rates and, for that matter, hire purchase rates, credit card rates and all related borrowing.
Bond yields and bond prices move in opposite directions.
When the world's biggest borrower (the United States government) has to raise its interest rate to find buyers, the world must pay attention.
What has put pressure on the American bond market?
Lack of growth
Oil volatility
A cautious Federal Reserve
Reluctant buyers
USA investors bracing for higher inflation
Petrol and diesel prices: the US vs New Zealand
Fuel prices per gallon make for interesting reading.
United States petrol
At 26 September 2026: US$4.49 per gallon
30 days earlier: US$4.10 per gallon
5 years ago: US$3.19 per gallon
United States diesel
At 26 September 2026: US$6.48 per gallon
30 days earlier: US$5.62 per gallon
5 years ago: US$3.39 per gallon
New Zealand, as at 26 September 2026
Petrol: NZ$16.00 per gallon
Diesel: NZ$14.68 per gallon
The New Zealand prices allow for litres per gallon and the New Zealand dollar currency conversion: 1 gallon = 4.54609 litres, and US$1 = NZ$1.77.
Pita's summary
An American bond market sell-off (which is partly in progress now) will trigger global financial instability. That will lead to an increase in worldwide borrowing costs, simply because the United States bond market is so big.
This would involve currency volatility.
Things may stabilise, but any move back to the old status quo would be unlikely, or slow at best.
The bond vigilantes are present not only in the USA but are also on the move in Japan, the United Kingdom, France and Germany.
Any major bond market volatility would send a key signal to a number of countries, but the process would end up having all sorts of unsound worldwide effects.
What should New Zealand learn from all this?
Keep debt in check: New Zealand's gross government debt should stay below 50% of GDP.
Close the gap: New Zealand needs to get on top of its fiscal (tax) shortfall of approximately NZ$10 to NZ$12 billion.
Trim spending and lift income: There is probably more room to reduce government expenses than to increase government income. But, say, a 2% decrease in expenses, coupled with a 2% increase in income and a freeze on several costs, would make a lot of sense and a lot of progress.
Hold inflation down: Inflation must be held below 3%, otherwise it triggers a whole lot of other issues.
Grow the economy: An increase in the overall New Zealand economy (that is, its GDP) would be the best result, as long as overall expenses were contained reasonably.
What do rising rates mean for your farm business?
Higher bond yields overseas have a habit of turning up in the interest rates New Zealand banks charge, on home loans and farm lending alike. If you'd like help working through what this could mean for your borrowing, profitability or business planning, get in touch with the team at Alexanders Rural. We're happy to help you get your financial management on a firm footing, whatever the bond vigilantes decide to do next.
DISCLAIMER
Any views or opinions expressed in this article are those of Pita Alexander only and do not reflect the views of any other person or organisation.
The information provided in this article is for informational purposes only and is not intended to be financial advice.
Any errors or omissions are the author’s own.