The world's major economies have seen their debt levels surge in recent years, while ever-increasing spending demands - from ageing populations to climate change and defence - are adding to the pressure.
Enter the Iran war, which has rekindled inflation risks that will strain governments hit by a multitude of shocks this decade alone.
The conflict triggered the biggest jump in borrowing costs in years in March in Europe. Heavily dependent on energy imports, the region's government finances are facing growing pressure from surging oil and gas prices.
A high debt burden that costs a government more risks hurting living standards by constraining spending and capping growth. In a worst-case scenario, a country can hit a wall and struggle to service its debt.
Rising borrowing costs
Government bond yields across the G7 have surged following the COVID-19 pandemic and Russia's invasion of Ukraine, as central banks raised interest rates aggressively to tame surging inflation.
Elevated longer-term borrowing costs also reflect that investors want better returns to compensate for the risk of holding the debt.
The Iran war is the latest challenge. Britain, where 10-year yields in March hit their highest since 2008, pays the highest among peers.
Going shorter
The difference between shorter and long-dated government bond yields has increased sharply, making it relatively more expensive to borrow for longer.
The pressure is being intensified by fiscal concerns, central banks reducing bond holdings and big traditional investors in long-term debt such as insurers and pension funds reducing their purchases from Japan to Britain.
To mitigate the impact, many governments have started selling bonds with shorter maturities. But that's risky too because they have to repay or refinance the debt sooner, so any rise in yields feeds faster into interest costs.
One-way track?
Debt is roughly equal to or higher than economic output across the G7 bar Germany, Europe's biggest economy.
The 2008 global financial crisis, the 2011-12 euro zone debt crisis and the 2020 pandemic all increased debt levels, hurting growth and raising spending.
Japan has the highest level, with debt more than double its output, while even Germany, once a champion of austerity, is ramping up its borrowing to fund defence and public investments.
Longer-term, ageing populations, interest bills and increased spending on defence and climate change will raise debt levels further unless there are policy changes.
Interest payments
Higher post-pandemic borrowing costs are feeding into governments' interest payments as they refinance low-cost debt at higher market rates.
While well below historical peaks for many countries, interest payments as a share of output have risen steadily across most G7 countries recently, notably in the United States.
In fact, interest payments across OECD countries, which include the U.S., already topped defence spending in 2024.
Rising risk
The term premium How Trump's policy risk is showing in Treasury bonds on U.S. Treasuries, a key measure of how much compensation investors demand for the risk of holding longer-term bonds, has risen since the pandemic.
That reflects anything from concern about U.S. fiscal policy to the Federal Reserve cutting its bond holdings and worries about its independence as well as longer-term inflation uncertainty.
It's a global phenomenon. The term premium across major OECD countries reached its highest in over 10 years, the organisation found recently.
Mind the gap
If there is one debt metric that has improved for some, it's how little investors are now willing to be paid to hold individual euro zone governments' bonds rather than those of Germany, which is deemed Europe's safest borrower.
The bloc has come a long way from its debt crisis when Greece needed a bailout and the risk of a euro zone breakup sent those costs surging.
Look at Italy. Once the poster child for debt woes, growing European cohesion after the pandemic, political stability and a lower budget deficit have pushed its debt risk premium to the lowest since 2008 recently.
In contrast, investors now attach greater risk to holding French bonds as a fractured political backdrop since a shock 2024 election slows efforts to rein in the budget deficit.
Buyer beware
Japan, the most indebted country in the developed world, is in the spotlight because the spending plans of Prime Minister Sanae Takaichi have rekindled fiscal concerns. The nation's debt sales are carefully watched for signs of stress.
Actually, Japan's bond market woes kicked off last May after a disastrous long-term bond sale.
Long-term Japanese bond yields surged to records after the sale of a 20-year bond saw the lowest level of demand since 2012 and another measure of investor sentiment reached its second-worst since at least 1987.
Japan trimmed longer-dated bond sales in response, helping stabilise demand. Still, borrowing costs face upward pressure.
(Reporting by Yoruk Bahceli, Dhara Ranasinghe and Rocky Swift; Graphics by Ben Welsh; editing by Elisa Martinuzzi and Toby Chopra)
Copyright (2026) Thomson Reuters.
This article was written by Rocky Swift, Dhara Ranasinghe, Yoruk Bahceli and Ben Welsh from Reuters and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.