Hope springs eternal at the International Monetary Fund. Its latest “World Economic Outlook” still expects world economic growth to accelerate from 3.2 percent this year to 3.4 percent in 2027. It does so despite mounting evidence that the U.S. bond market is unraveling, that the French fiscal crisis could trigger another round of the Eurozone sovereign debt crisis, and that a widening Middle East conflict and a super El Niño could spike world energy and food prices. The IMF thus risks being caught flat-footed about a probable global economic downturn in the year ahead, as it was about the 2008–2009 Great Economic Recession.
Start with the U.S. Treasury market, a key influence not only on domestic borrowing rates but on interest rates around the world. Since the start of the year, the all-important ten-year Treasury yield has surged by more than 100 basis points to 5.3 percent, a multi-decade high. The 30-year yield now sits around 5.6 percent. Public debt sustainability concerns, underlined by a budget deficit of 6 percent of GDP and a debt level near its postwar record; massive borrowing by artificial intelligence companies to fund infrastructure investment; and rising inflation expectations are driving yields higher.
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