Germany is funding a military expansion by borrowing, with no retreat from its welfare state. Britain plans to expand its own. Both bills go to the same auction, alongside technology companies borrowing enormous sums for artificial intelligence data centres. Nor is this only a Western habit. Beijing’s headline deficit is 4% of GDP, or a record 9.1% counting the bonds outside it. China’s total debt has doubled as a share of GDP since 2010 and tops 300%, while America’s has fallen to about 265%.
OECD central governments issued US$17 trillion of bonds in 2025 and are projected to issue US$18 trillion this year. Corporates added US$ 6.8 trillion. All of it lands in a market where central banks have stopped buying.
More bonds offered, not proportionately more buyers at the same price, so the yield must rise. German 10-year yields are at their highest since 2011, Japanese yields have crossed 3%, and British gilts are at their highest since the financial crisis.
Cheap money has a maturity date. A higher yield is not felt today; it is felt at maturity. Borrowers who locked in cheap fixed rates keep them right up to the day the debt rolls off and must be refinanced at whatever the auction is charging then. It will bite hardest where the debt is largest and the maturities shortest. Heavily indebted institutions are not repriced gradually. They are repriced in instalments, on a timetable set years ago.
New Zealand is not exempt. In March, Fitch revised New Zealand’s outlook to negative, affirming AA+ and forecasting government debt at 56% of GDP by June 2027. Six days later, the Local Government Funding Agency received the same revision, automatically, because its rating is equalised with the Crown’s. LGFA provides most council borrowing in this country, Hastings included.
Everyone drinks from the same pond. Sovereigns, councils, banks, businesses, then the household. Nobody in Taihape voted on the German defence budget. It is in the swap rate all the same, and the swap rate is in the mortgage at renewal.
Milton Friedman’s advice was to keep your eye on one thing only: how much government is spending, because that is the true tax. The auction is where the bill arrives.
For the investor, this cuts both ways. After a decade of being told the coupon was a rounding error, it is worth having again.
But a yield is not a gift. It is compensation, and the question is compensation for what. Credit quality, term, currency, and who stands behind the issuer.
Bonds belong in a well-engineered portfolio. Not every bond belongs in yours.
Charles II discovered that credit, once lost, is not bought back. It is earned back, slowly, and usually by someone else’s generation.
The investor who reaches for yield without asking what it is paying for learns a smaller version of the same lesson. That question is easier to answer when the person answering it is bound by duty to put your interests before their own.