The rising cost of money
Governments across the world are paying more to borrow. The consequences reach well beyond bond markets, which have been selling off. Foord Managing Director PAUL CLUER explains how higher interest rates find their way into household budgets, including here in South Africa.
America’s public debt has passed $40 trillion. Interest on past borrowing now accounts for more than half its annual budget deficit. Across the OECD group of rich countries, governments have spent more than $2 trillion on debt interest last year. These are bills that must be paid before a government builds a road or staffs a hospital.
The cost of government debt has risen sharply around the world. In September, the yield on 30-year US Treasury bonds reached 5.5%, its highest since 2004. Japanese 10-year yields touched 3% for the first time in three decades. Britain’s 30-year borrowing costs climbed towards 6%. When investors demand higher yields, newly issued bonds cost governments more. Those yields also influence borrowing costs throughout the economy.
Why are lenders demanding more? The US war on Iran has raised energy costs and revived inflation fears. Governments continue to borrow heavily, while central banks are buying fewer bonds than they once did to artificially push rates down. The world’s tech giants are also seeking to borrow vast sums to build AI data centres. Investors therefore have more borrowers competing for their money and are now demanding better terms. Meanwhile, resilient US growth has also led markets to expect further increases in short-term interest rates.
For American households, one effect is already apparent. Rates on 30-year fixed-rate mortgages have surpassed 7%. A family taking out a new loan faces a much larger monthly payment than it would have done when rates were low. This is freezing up the US housing market as a result. In countries where home loans have variable rates, central-bank decisions reach monthly payments much sooner. Higher borrowing costs can also deter housebuilding and business investment, affecting jobs and the supply of homes.
The pressure on public finances will take longer to appear. Much of the debt outstanding today was issued when rates were lower. As debt matures, governments must replace it at prevailing yields. A rising interest bill leaves less room in future budgets for services or forces a harder choice over taxes. Borrowing for shorter periods can reduce the cost today, but brings the next refinancing date closer, adding risk.
South African home loans mostly have variable rates linked to the SA Reserve Bank’s policy rate, often through the banks’ prime rate. Higher oil prices add to local inflation, while persistently high global rates could put pressure on the rand and make imports dearer. In September, SARB raised its policy rate by a quarter of a percentage point to 7.25%. For illustration, that adds about R850 a month to repayments on a R5 million home loan with 20 years left, assuming its rate rises from 10.5% to 10.75%.
South Africa also spent about R420 billion servicing government debt in the last financial year — more than a fifth of all tax revenue. Treasury expects that share to fall if its efforts to stabilise debt take hold. However, a lasting rise in borrowing costs would make the task harder as old bonds mature.
Higher yields give new bond buyers more income, but they have hurt investors who already hold bonds with the longest maturities. Foord has long been wary of that risk. For everyone else, much of the cost still lies ahead. Cheap loans and government bonds will expire, and their replacements will carry today’s higher rates. That will affect mortgage payments, business investment and the money that governments have left for public services — even if bond yields stop rising tomorrow.