Investors warn of fiscal dominance as rising sovereign debt fuels pressure on central banks

A growing chorus of investors are warning that central banks are being pressured to keep rates artificially low, which former IMF Chief Economist Kenneth Rogoff described as a new period of “fiscal dominance” in comments to the Financial Times. Behind the pressure are mounting government borrowing costs for many of the world’s largest economies, which have pushed some countries to press for monetary policy changes to tackle often record sovereign debts.

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How Trump’s attacks on Fed Chair could impact interest rates trajectory: Renewed attacks by US President Donald Trump on Fed Chair Jerome Powell following last week’s inflation data are fueling speculations that US monetary policy will remain looser than required. This sentiment was emboldened by the appointment of rate-cut advocate Stephen Miran to the Fed board.

Short-term US Treasury yields fell last week in anticipation of cuts, while 30-year yields rose, a move Capital Economics analysts called “an unusual response to a relatively uneventful data release.” The analysts added that the market may be pricing in what would happen “if Powell were actually removed or the White House took other steps to exert more control of monetary policy, in particular nominating a new Fed chair seen as a stooge for the president.”

The tension between short-term and long-term rates in the US is mirrored globally. The yield gap between two-year and 30-year Treasuries is now the widest since early 2022, while in the UK, 30-year gilt yields hover near 5.6% — their highest in over 25 years. Even in fiscally conservative Germany, 30-year borrowing costs have crossed the 3% mark for the first time since 2011. Investors are watching whether central banks like the Bank of England will scale back bond sales next month amid concerns that quantitative tightening could further drive up borrowing costs.

The OECD expects sovereign borrowing by developed economies to hit USD 17 tn this year, up from USD 16 tn in 2024 and USD 14 tn in 2023, according its Global Debt Report 2025 (pdf). That rising debt burden is clashing with efforts by central banks to normalize their balance sheets after years of quantitative easing. Economists warn that as debt-servicing costs rise, some governments could switch to issuing more short-term paper, increasing exposure to market swings and complicating monetary policy. “The volatility makes it harder to own the long end, and therefore harder to issue there,” said Jupiter Asset Management fixed income head Matthew Morgan.

MARKETS THIS MORNING-

Asian markets are mixed in early trading this morning as traders stand steady in anticipation of Powell’s speech at the Jackson Hole Symposium. Japan’s Nikkei and the Hang Seng are both in the red, down 0.4% and 0.1% respectively. The Kospi and the Shanghai Composite are both up, looking at gains of 0.9% and 0.3%, respectively.

THE CLOSING BELL-

The EGX30 fell 1.0% at yesterday’s close on turnover of EGP 5.4 bn (2.5% above the 90-day average). Local investors were the sole net buyers. The index is up 20.2% YTD.

In the green: EFG Holding (+4.1%) and Misr Cement (+2.4%).

In the red: Arabian Cement (-6.0%), Juhayna (-5.2%), and Credit Agricole (-3.4%).