Article #474
In January 1672, Charles II stopped paying his creditors.
The Stop of the Exchequer was announced as a temporary suspension. A delay, not a default. The distinction mattered a great deal to the Crown and not at all to the people who were owed the money. A borrower who cannot pay on the day they promised has defaulted, whatever the announcement calls it.
The goldsmith bankers of Lombard Street, who had lent the Crown the money, were ruined. English government credit took a generation to recover. What eventually replaced it was something better than a king's promise: a funded national debt, the Bank of England in 1694, and a Parliament standing behind the borrowing rather than a monarch who could walk away from it.
Over the century that followed, Britain outlasted Louis XIV and then Napoleon, both of whom governed larger and wealthier countries. Britain did not win because it was richer. It won because it could borrow more cheaply, for longer, and go on borrowing when its rivals could not. Creditworthiness turned out to be a weapon.
The price of borrowing is not set by announcement. It is set at auction, by whoever turns up with capital and a choice about where to put it. Central banks can turn up too, and for a decade they did. But the auction reasserts itself the moment the official bid is withdrawn.
The OCR is not the whole story
On 2 September the Reserve Bank lifted the Official Cash Rate to 2.75%, with annual inflation at 4.1% in the June quarter, driven largely by fuel prices flowing from the Middle East conflict [1].
The OCR sets the short end. It does not set the rate on a five-year term deposit, a two-year fixed mortgage, or a ten-year bond. Those price off wholesale rates, and wholesale rates are set in a global auction New Zealand does not run and cannot influence.
A great many borrowers are turning up to that auction at once.
Germany is funding a substantial military expansion by borrowing, with no corresponding retreat from its welfare state. Britain plans to expand its own. The bill for both goes to the same auction. The pattern repeats across the West, while the technology companies raise enormous sums to build artificial intelligence data centres.
Nor is this only a Western habit, and China is the clearest case of a number that is not what it is announced to be. Beijing's headline deficit for 2026 is 4% of GDP. Once the CNY 4.4 trillion of local government special purpose bonds and the CNY 1.3 trillion of ultra-long special treasury bonds sitting outside that headline are counted, the consolidated deficit reaches a record 9.1% of GDP [2]. National debt is set to rise by close to CNY 14 trillion this year alone.
The rate matters more than the level. Mark Williams, chief Asia economist at Capital Economics, calculates that China's total debt outside the financial sector has doubled as a share of GDP since 2010 and now tops 300%, putting its indebtedness, in his words, in a league of its own. The comparison most readers expect runs the other way. Broad American debt, public and private, has fallen as a share of GDP since 2010, to around 265% [3]. Nearly 40% of China's is owed by the public sector, local government financing vehicles included [3].
The numbers are not small. OECD central governments issued USD 17 trillion of bonds in 2025 and are projected to issue USD 18 trillion this year. Corporates added USD 6.8 trillion. All of it lands in a market where central banks, having spent a decade as the buyer of last resort, have stopped buying [4]. Local government sits in the same queue, one step removed, borrowing through agencies that price off the sovereign.
More bonds offered, not proportionately more buyers at the same price, so the yield must rise to attract the capital. German ten-year yields are at their highest since 2011, Japanese yields have crossed 3%, and British gilts are at their highest since the financial crisis [5].
The honest counter-argument
It would be tidy to say that governments and technology companies are crowding everybody else out, and leave it there. It would also be a little too tidy.
Corporate borrowing did reach a record in 2025, USD 13.7 trillion raised across bond and syndicated loan markets, passing the 2021 peak. Nine large technology companies accounted for USD 122 billion of it, around 45% of all bond issuance by technology firms worldwide and more than three times the annual average since 2000. Yet the OECD's own assessment is that this came to no more than 15% of investment grade issuance by non-financial firms in the United States, and was absorbed without market-wide friction [6]. Capital markets are deep, and the pool is not fixed in the way the word crowding suggests.
There is also a competing explanation for the move in yields that has nothing to do with supply at all. The oil price shock has reignited inflation expectations, and investors demanding more compensation for inflation will lift yields whether or not another bond is ever issued.
Both explanations are probably doing some of the work. That is usually how markets behave, and anyone offering a single clean cause is selling something. What is not in dispute is the direction of travel, or that a borrower refinancing in 2029 will pay whatever the market asks in 2029, regardless of which explanation was correct.
There is a second detail in the OECD data worth sitting with. Issuers have been shortening their maturities. In 2025 the ratio of bonds issued at thirty years and beyond, compared with those issued at one to five years, was the lowest since at least 2008 [4]. Short borrowing is cheaper today. It also means the debt comes back around sooner, and more often. That is a decision to pay less now, in exchange for finding out later.
Cheap money has a maturity date
A higher yield is not felt today. It is felt at maturity.
Nearly 80% of what OECD governments borrow this year is not new spending at all. It is refinancing debt that already exists [4]. Borrowers who locked in cheap fixed rates a few years ago 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 by people who are frequently no longer there.
New Zealand is not exempt. In March, Fitch revised New Zealand's outlook to negative while affirming the AA+ rating, forecasting general government debt at 56% of GDP by June 2027 and citing delayed fiscal consolidation [7]. Six days later the Local Government Funding Agency received the same revision, automatically, because as a government-related entity its rating is equalised with the Crown's [8]. LGFA provides most council borrowing in this country, Hastings included.
Everyone drinks from the same pond.
Sovereigns, councils, banks, businesses, then the household. Different straws at different depths, the same water. 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. Thatcher put it less gently, that we have been ruled by men who live by the illusion that you can spend money you have not earned without eventually falling into the hands of your creditors. Whatever one makes of the politics, the arithmetic has not been repealed. The auction is where the bill arrives, and it arrives with interest.
What this means for the investor
For anyone with savings, this cuts both ways.
After a decade of being told the coupon was a rounding error, it is worth having again. Income that had effectively disappeared from conservative portfolios has come back, and for retirees drawing on capital that is a meaningful improvement rather than a technical one.
But a yield is not a gift. It is compensation, and the whole question is compensation for what. Credit quality, term, currency, and who stands behind the issuer. A bond paying more than the one beside it is priced that way for a reason, and the reason is rarely generosity. When someone offers a return well above the market for what they describe as much the same risk, one of those two claims is wrong, and it is not usually the return.
Nor is the answer to reach for duration simply because longer bonds pay more today. Term is a risk, not a free lunch, and the investor who buys a long maturity to capture an extra sliver of yield has taken a view on the next decade of inflation whether they meant to or not.
Bonds belong in a well-engineered portfolio. Not every bond belongs in yours. All bonds are equal, as Orwell might have put it, but some are more equal than others.
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.
Nick Stewart
(Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe,
Ngāti Waitaha)
Financial Adviser and CEO at Stewart Group
Stewart Group is a Hawke's Bay and Wellington based CEFEX & BCorp certified financial planning and advisory firm providing personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
References
1. Reserve Bank of New Zealand (2 September 2026). OCR increased by 25 basis points to 2.75%. https://www.rbnz.govt.nz/news-and-events/news/2026/09/ocr-increased-by-25-basis-points-to-2-75
2. China Power Project, Center for Strategic and International Studies (2026). Making Sense of China's Government Budget. https://chinapower.csis.org/making-sense-of-chinas-government-budget/
3. Fortune (11 May 2026). Forget US debt, China's total borrowing is in a league of its own. https://fortune.com/2026/05/11/us-debt-china-total-borrowing-public-private-gdp-ratio-lgfv/
4. OECD (2026). Global Debt Report 2026: The investor base for government and corporate bond markets. https://www.oecd.org/en/publications/global-debt-report-2026_e9d80efd-en/full-report/the-investor-base-for-government-and-corporate-bond-markets_e68b90b3.html
5. CNBC (3 September 2026). Global bond yields rising: Treasuries, JGB, Bunds. https://www.cnbc.com/2026/09/03/global-bond-yields-rising-treasuries-jgb-bunds.html
6. OECD (2026). Global Debt Report 2026: Corporate debt market outlook in a transforming world. https://www.oecd.org/en/publications/global-debt-report-2026_e9d80efd-en/full-report/corporate-debt-market-outlook-in-a-transforming-world_cf86a220.html
7. Fitch Ratings (20 March 2026). Fitch revises outlook on New Zealand to negative; affirms at AA+. https://www.fitchratings.com/research/sovereigns/fitch-revises-outlook-on-new-zealand-to-negative-affirms-at-aa-20-03-2026
8. New Zealand Local Government Funding Agency (26 March 2026). Credit Rating Outlook Revised to Negative by Fitch Ratings. NZX announcement. https://announcements.nzx.com/announcement/469979