In 1998, the Thai currency crisis quickly spread to other Asian countries with weak balance of payments situations. That led to the Asian currency crisis that shook world financial markets. In 2010, the Greek sovereign debt crisis soon spread to Portugal, Ireland, Italy, and Spain, all of which had high debt levels and were stuck in a Euro straitjacket. That led to the Eurozone sovereign debt crisis that hindered the world economic recovery. The lesson from these crises was that in today’s world of free-flowing capital, acute problems in one country can draw attention to other countries experiencing similar economic and political weaknesses.
All of this has to make us wonder whether the unfolding of yet another United Kingdom bond market crisis might be an early warning sign for other countries with unsustainable public finances and serious political constraints. In particular, we have to wonder whether it might be an early warning signal for the United States that has worse public finance fundamentals than the UK and that might be on its way to another period of political gridlock.
The UK is no stranger to bond-market and exchange market crises. As recently as 2022, in response to then Prime Minister Liz Truss’s ill-considered mini-budget of large unfunded tax cuts, sterling plunged and gilt yields spiked forcing pension funds into a damaging sell-off spiral. That required the Bank of England to intervene with an emergency bond-buying program. The government was ultimately forced to reverse most of the tax cuts, with Liz Truss resigning as prime minister within weeks.
Today, the UK gilt market is again under great stress. The 30-year UK bond yield has spiked to 5.6 percent, a level last seen in 2008. That makes it comfortably the highest government bond yield among the G-7 countries. Maintenance of such a high-yield risks forcing the UK into a so-called debt-doom-loop where high interest rates trigger a recession and add to the government’s interest expenditures.
A primary reason for the UK’s current bond market slump is the country’s poor public finances, its low economic growth, and its deteriorating inflation outlook. The public debt to GDP ratio has now climbed to 100 percent and the government budget deficit has swelled to around five percent of GDP. Meanwhile, the economy managed to eke out only 1.25 percent growth in 2025 and inflation has increased to around 3.5 percent. There is every prospect that inflation will now accelerate as a result of the Iran-induced energy price shock.
Another reason for the UK bond market rout is the worrying signs of political dysfunctionality. Sir Keir Starmer appears well on his way to becoming the fourth UK prime minister to be ousted from their job in the past five years. Worse yet, Andy Burnham, Manchester’s current mayor, appears to be the candidate most likely to succeed Starmer. He is to the left of Starmer and is known to be an advocate for increased public spending.
Unfortunately for the United States, there are all too many parallels with the UK government bond market situation. For a start, if anything, the US budget situation appears to be more worrying than that in the UK. The US public debt is already around 100 percent of GDP and the budget deficit is likely to exceed six percent of GDP as far as the eye can see. If accepted, Trump’s proposal to increase defense spending by $500 billion over the next two years would make a bad budget situation worse as would the Supreme Court’s recent nullification of $160 billion in import tariff collections.
Like the UK, the US is being perceived by the markets as lacking the political will to rectify the parlous state of its public finances. That perception could harden should November’s midterm election usher in another period of divided government and political gridlock. Meanwhile, inflation has now accelerated to close to four percent and Trump’s relentless attacks on the Federal Reserve’s independence risks inviting markets to believe that the US will try to inflate its way out of its public debt problem. This has to be of particular concern to a country where foreigners own around $8.5 trillion, or some 30 percent, of all outstanding Treasury bonds.
If the US does experience a government bond market crisis later this year, the Trump administration cannot claim that there were not clear early warning signs both at home and abroad. Since the start of the Iran war, the 10-year Treasury bond yield has spiked more than 50 basis points to 4.6 percent. At the same time, the unfolding UK bond market crisis could be foreboding that similar troubles will be spreading to counties that share the UK’s public finance weaknesses.