Rising Sovereign Yields Raise the Fiscal Stakes

IMF Blog, October 14, 2026

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New IMF research shows that when debt is already high, rising policy rates lead to a larger deterioration in fiscal deficits and debt.
High debt makes market interest rates more sensitive to fiscal developments; in the United States, evidence shows that long-term forward rates have become more sensitive to projected government debt in recent years.
Between February and September, the Group of Seven’s average 10-year government bond yield increased by over 1 percentage point, reaching its highest level in nearly two decades.
Global public debt is expected to exceed 100 percent of global gross domestic product by 2030, a level last reached in the immediate aftermath of World War II.
Several forces are pushing yields higher in advanced countries: the oil price shock, persistent inflation, stronger investment demand, and higher expected future growth linked to AI. Fiscal fundamentals are central, with high debt, spending pressures, and prospects of large bond issuance putting upward pressure on yields.

The effective average interest cost of government financing is projected to rise from 2.3 percent in 2021 to 3.7 percent by 2031.
In the United States, interest payments are projected to climb from about 2.8 percent of GDP before the pandemic to 5.7 percent in 2031, roughly equal to projected expenditure on Social Security.
In low-income countries, interest payments today consume over 15 percent of tax revenues.
Between 2011 and 2019, the average cost was around 9 percent of GDP.
The global primary deficit (a government’s revenues minus expenses before interest payments) is about 3.3 percent of GDP in 2026.
Stabilizing the global debt-to-GDP ratio in 2026 would require cutting the global primary deficit down to around 2.6 percent.
Because global debt is projected to keep rising, a further adjustment of a similar magnitude would be needed in the years ahead.

Governments in several advanced economies are refinancing more debt at shorter maturities, causing higher policy rates to pass through to government borrowing costs more quickly.
When inflation remains above target and higher energy prices add to price pressures, central banks may need to keep rates higher for longer, which worsens debt dynamics; fiscal concerns can themselves push market rates higher.
High debt and shorter maturities can make restoring price stability more difficult and more costly for public finances.
Higher benchmark yields in major economies can spill across borders, worsening debt dynamics elsewhere.

Financing conditions for many emerging market economies have remained favorable, with strong sovereign issuance, higher commodity prices, and compressed spreads; some frontier economies have regained access to international markets.
That favorable window may not last; a shift in risk appetite could sharply reduce issuance space and widen spreads.
For low-income countries where external financing is already tighter, strengthening tax systems and improving spending efficiency are essential to preserve priority spending.

Major advanced economies with high debt need concrete measures anchored in credible medium-term plans and realistic assumptions to put debt on a sustainable path, contain borrowing costs, and limit spillovers to the rest of the world.
Emerging market economies should reduce fiscal vulnerabilities and strengthen debt management.
Low-income countries should strengthen tax systems and improve spending efficiency to preserve priority spending.
Delaying adjustment would cause interest burdens and fiscal vulnerabilities to build, further narrow policy options, and ultimately require a larger adjustment to stabilize debt; the more countries wait, the more painful the adjustment becomes.