The uproar this week in global markets underlines one overwhelming fact: Investors can’t ignore bonds anymore.

Yields on long-term government bonds are soaring across the developed world, surging to heights they haven’t touched since before the financial crisis in 2008.

To some eyes, the run-up in yields amounts to a long-overdue reappearance of the bond vigilantes – those semi-mythical big investors who were once believed to push spendthrift governments back into line whenever public finances get too far out of whack. Whether the vigilantes actually exist is a fascinating question, but, one way or another, market forces are laying down the law and demanding that investors recognize a new reality when it comes to long-term debt – the stuff that matures 10 to 30 years from now.

For the first time in years, these long-term bonds are looking like a half-decent investment option. U.S. 30-year bonds are now yielding over 5 per cent; British 30-year bonds are at nearly 6 per cent. Those payoffs are more than double what was on offer just five years ago and up substantially from even a few months ago.

The catch is that higher bond yields for investors mean higher borrowing costs for governments. For that reason, rising bond yields are unlikely to remain just a bond market phenomenon. They have the potential to rattle stock prices and shake the broad economy.

The powers-that-be are worried. U.S. Secretary of the Treasury Scott Bessent staged a massive intervention this week, doubling the Treasury’s purchases of long-term U.S. bonds in an attempt to put a lid on rising yields. (Bond yields move in the opposite direction to bond prices, so Mr. Bessent’s hope was that his purchases would drive up the prices of long-term bonds and thereby drive down their yields.) At last report, the intervention was having little effect.

Global bond sell-off lifts Canadian borrowing costs to highest level since 2009

As of Friday, U.S. 30-year Treasuries were yielding just over 5.2 per cent, their highest payout since 2007. Other countries are also confronting a similar increase in borrowing costs. British 30-year bonds are yielding around 5.8 per cent, their highest level since the late 1990s. Meanwhile, Canadian 30-year bonds, even with a relatively restrained 4.2 per cent yield, are paying the most since 2009.

To be sure, many countries fared just fine with bond yields higher than this two or three decades ago. What that historical comparison misses, though, is how much things have changed in 20 years. Thanks to massive borrowing during the financial crisis and the pandemic, most countries are far more indebted than they were back in the day.

The United States is one of the most egregious cases. Back in 2007, on the eve of the financial crisis, federal debt held by the public amounted to just over one-third of the country’s economic output. Now the national debt amounts to nearly 100 per cent of gross domestic product.

Mix those towering levels of debt with rising bond yields and the cost of keeping up with interest payments soars to excruciating levels. Interest costs already gobble up about 14 per cent of the U.S. federal budget, which is more than the country spends on national defence. Rising bond yields threaten to send interest costs spiralling even higher.

A similar though not-quite-so-extreme situation holds true in Canada, where interest costs on the federal debt account for just over 10 per cent of federal spending. Paying those interest expenses costs Ottawa nearly as much as it sends provinces in health transfers. The last thing it needs is for rising yields to swell its interest bill even more.

What can governments do to bring bond yields back to earth? For starters, they can hope. Bond yields have been pushed up in recent months by massive tech-sector borrowing. If the stampede to build data centres for artificial intelligence slows down, the competition for loans could ease and interest rates might sink.

In the long run, though, the only sure way to restrain bond yields is for governments to address their deficit issues. The less that the public sector has to borrow, the less pressure there will be on debt markets.

Unfortunately, cutting public expenditures is harder than it sounds. Aging populations, disruptions caused by climate change and artificial intelligence, as well as an increased need for national defence offer powerful reasons to spend.

The situation is particularly dire in Washington. It is running enormous deficits, equal to 6 per cent of gross domestic product, with no end in sight. Cutting the deficit down to size would involve either stinging tax increases or brutal cuts to public services. No politician is eager to explain that reality.

Investors are scrambling to figure out what comes next. One possibility is that Mr. Bessent will succeed in capping long-term bond yields, but that markets will express their skepticism over Washington’s financial condition by dumping the U.S. dollar. Both bitcoin and gold jumped this week as traders rushed to play this “debasement trade” by buying alternatives to the greenback.

But many paths are possible. Washington could surprise everyone and make a serious effort to address its budget problems, even at the risk of causing an economic slowdown. Alternatively, investors could find the new yields on long-term bonds so attractive that money begins to drain out of a stock market teetering at record highs.

The one sure thing is that the bond market is back in charge. Get used to it.