A global sell-off in bond markets deepened this week amid fears over high government spending in developed economies, in a development which could have severe implications for heavily indebted African economies.
Earlier this week, the yield on thirty-year US treasuries hit 5%, while Japanese government bonds hit a record high of 3.29%. In the UK, thirty-year gilts are currently yielding more than 5.5%, the highest yield for around three decades. The eurozone is seeing similar moves in its bond markets.
This upward pressure on yields has largely been sparked by market fears over the amount of government spending by developed economies, particularly since the Covid-19 pandemic. The higher cost of raising capital reflects increased scepticism over the sustainability of such spending. With global debt hitting a record $324tn early this year, markets are reluctant to finance yet more spending.
Specific trends in the US, such as President Trump’s perceived attack on the independence of the Federal Reserve, have also contributed to higher yields on dollar-denominated debt.
Frontier markets spillover
M’khuzo Mwachande, an investment banker based in Lusaka, tells African Business that “investors are now demanding higher premiums to hold government paper and that repricing is spilling directly into frontier markets.”
Mwachande says that, with investors now able to secure high yields on debt issued in markets such as the US, there is less incentive to commit capital to higher-risk African markets.
“For investors, higher US and European yields make African risk look less compelling,” he says. “Capital is flowing back into developed markets, tightening liquidity in African debt and equity markets, and forcing spreads wider. Those who remain demand higher returns, strong reform commitments, and credible fiscal anchors.”
He adds that these capital outflows are likely to put further pressure on African currencies by “raising imported inflation and complicating already fragile balance of payments positions.”
This week the US dollar strengthened by around 1% against the South African rand, Africa’s most widely traded currency, with Mwachande suggesting further gains against the rand, naira, and shilling are to be expected.
Africa struggles with debt servicing
These moves in global bond markers come at a time when several major African economies are already struggling to service their debts without crowding out social and infrastructure spending.
Ghana, for example, is currently facing high debt service repayments and has been forced into spending cuts and lowering real public spending per capita. Kenya has similarly tried to get its debt situation under control by cutting public spending and raising taxes, but this has helped spark protests and proved politically challenging.
Mwachande notes that the cost of both local and international debt is growing across the continent.
“Countries like Kenya, Ghana, and Nigeria face double-digit local yields, while South Africa is trading near 10%. Access to international debt markets is narrowing just as fiscal needs grow,” he says. “Put simply governments will spend more on interest payments instead of schools, hospitals, and infrastructure.”
“The risk is clear: a prolonged period of elevated global yields could lock African economies into a harsher financing environment, testing both fiscal resilience and investor confidence,” Mwachande tells African Business. “The era of cheap money is over.”
