Global Debt Problem - OECD

 According to the Global Debt Report 2026, the sovereign borrowing outlook is characterized by record-high funding needs, rising interest costs, and significant structural shifts in the investor base.

Borrowing Requirements and Debt Levels

• Record Issuance: Gross borrowing by OECD central governments reached an all-time high of USD 17 trillion in 2025 and is projected to climb further to USD 18 trillion in 2026.
• Refinancing Dominance: A critical feature of this outlook is that nearly 80% of gross borrowing is now dedicated to refinancing existing debt rather than new spending. Refinancing requirements hit USD 13.5 trillion in 2025 and are expected to reach USD 14 trillion in 2026.
• Rising Debt Stock: Outstanding sovereign bond debt in the OECD area reached USD 61 trillion in 2025. While the debt-to-GDP ratio remained stable at 83% in 2025, it is projected to rise to 85% in 2026, the highest level since 2021.

Issuance Strategies and Refinancing Risk

• Shift to Shorter Maturities: To mitigate the impact of persistently high long-term interest rates, many governments have rebalanced their issuance towards shorter maturities. The share of issuance with a maturity over 10 years reached its lowest point since 2009 in 2025.
• Reliance on Treasury Bills: T-bills have become a vital shock absorber, now accounting for 15% of the total debt stock and roughly 47% of gross borrowing.
• Refinancing Pressure: While shortening maturities lowers current interest expenditures, it significantly increases refinancing risks. This pressure is particularly acute for low-income countries, where more than half of outstanding bonds are set to mature within the next three years.

Borrowing Costs and Fiscal Sustainability

• Elevated Yields: Long-term government bond yields continued to rise in 2025, with 30-year yields reaching a median of 4.1%. Average estimated 10-year term premiums reached 0.84%, the highest level in over a decade.
• Fading Inflation Support: In previous years, high inflation helped reduce debt-to-GDP ratios. However, as inflation falls and interest payments rise, this effect is reversing; in 2026, interest payments are projected to increase the OECD aggregate debt ratio by 2.5 percentage points, outweighing the 2.4 percentage point reduction from inflation.
• Interest Expenditures: Aggregate OECD interest-to-GDP ratios reached 3.3% in 2025, nearing the highest levels of the past ten years.

The Changing Investor Base

• Withdrawal of Central Banks: As central banks continue to shrink their balance sheets through quantitative tightening, the market has become increasingly dependent on more price-sensitive and leveraged investors, such as hedge funds and households.
• Hedge Fund Role: Hedge funds have emerged as marginal buyers and critical providers of liquidity, accounting for nearly a third of trading volumes in core markets. While they provide much-needed liquidity, their presence may increase market sensitivity to shocks.
• Institutional Shift: A structural migration from Defined Benefit (DB) to Defined Contribution (DC) pension schemes is reducing the demand for long-duration assets, contributing to steeper yield curves.

Market Resilience and External Risks

• Surface-Level Stability: Despite record borrowing and high deficits, markets functioned effectively in 2025, with improved liquidity and moderated volatility.
• Geopolitical and Policy Uncertainty: This stability masks deeper risks, including heightened geopolitical tensions and trade disputes. Nearly all surveyed sovereign issuers expect geopolitical risk to continue affecting market operations and liquidity in 2026.
• Vulnerability to Shocks: The combination of record issuance, increased reliance on leveraged participants, and uncertain fiscal trajectories makes markets susceptible to sudden bouts of volatility.

In the context of the Global Debt Report 2026, corporate debt markets are undergoing a fundamental transformation characterized by record-high borrowing, the massive capital demands of the artificial intelligence (AI) expansion, and a shift toward a more electronic and transactional market structure.

Market Activity and Outstanding Debt

• Record Issuance: Global corporate debt issuance reached a historic high of approximately USD 13.7 trillion in 2025, split between USD 6.8 trillion in corporate bonds and USD 7 trillion in syndicated loans.
• Total Outstanding Debt: By the end of 2025, outstanding corporate debt stood at USD 59.5 trillion. While issuance is at a record, real outstanding amounts remain below the 2020 peak.
• Rising Interest Costs: While corporate interest expenditures have risen more slowly than sovereign ones due to fixed-rate structures, the gap is narrowing. Half of outstanding investment-grade bonds now carry an interest rate above 4%, the first time this has occurred since 2016.
• Refinancing Pressure: A "maturity wall" is approaching; approximately 24% of investment-grade and 31% of non-investment grade debt is set to mature between 2026 and 2028, much of which must be refinanced at significantly higher current market rates.

The AI Expansion as a Market Driver

The AI race is shifting the technology sector from an "asset-light" model to one of extreme capital intensity.

• The Hyperscalers: Nine major firms (including Microsoft, Alphabet, and Meta) issued USD 122 billion in bonds in 2025—nearly half of all global technology firm issuance.
• Massive Capital Needs: Projections for these nine firms suggest USD 4.1 trillion in capital expenditure between 2026 and 2030. If half of this is bond-financed, they would account for 15% of historical annual global issuance by non-financial companies.
• Private Credit and Structural Complexity: AI financing is blurring the lines between markets. For example, Meta entered a USD 29 billion joint venture with Blue Owl Capital to fund data centers, using a mix of equity and privately placed bonds.

The Puzzle of Low Credit Spreads

Despite high geopolitical and macroeconomic uncertainty, corporate credit spreads remain near historical lows. The sources attribute this to three main factors:

1. Strong Fundamentals: Corporate cash levels are high, earnings prospects are strong, and default rates are projected to remain below historical averages.
2. Relative Sovereign Risk: As sovereign debt levels and yields have spiked, the "benchmark" against which corporate risk is measured has risen, causing spreads to tighten relatively; some major companies now even trade at negative spreads to their government equivalents.
3. Liquidity Improvements: A significant portion of spread reduction is due to a falling liquidity premium. Advancements in electronic trading, the rise of portfolio trading, and the presence of ETFs have made corporate bonds easier and cheaper to trade.

Structural Shifts and Convergence with Equity

The report highlights that corporate debt markets are increasingly resembling equity markets in several ways:

• Changing Investor Base: Regulations have forced banks to step back from "warehousing" bonds. Their role has been filled by Exchange Traded Funds (ETFs), investment funds, and Principal Trading Firms (PTFs) that use high-frequency, automated strategies.
• Increased Concentration: Like equity markets, corporate bond markets are becoming concentrated around a small number of massive technology firms.
• Price Co-movement: There is an increasing correlation between credit spreads and equity prices (hedge ratios), particularly during stress episodes, which may exacerbate market volatility.
• Collateral Uncertainty: The underlying assets for much AI debt—data centers—have uncertain long-term value due to rapid technological obsolescence, creating a risk profile that is more equity-like than traditional real-estate-backed debt.

The Global Debt Report 2026 highlights a fundamental transformation in the investor base for government and corporate bonds, characterized by a transition from price-insensitive official sectors to a more price-sensitive and leveraged group of private participants. This evolution is driven by central banks' withdrawal from asset purchase programs, stricter banking regulations, and structural shifts in pension systems.

The Retreat of Central Banks and Quantitative Tightening

Central banks, which were the dominant domestic holders of government debt during years of quantitative easing (QE), have significantly reduced their footprint.

• Declining Shares: After peaking at 30% of domestic government bond holdings in 2021, central bank shares fell to 20% in 2025 as they continued shrinking their balance sheets through quantitative tightening (QT).
• Normalization: Despite this retreat, central banks remain the largest domestic holders in many jurisdictions, with absolute holdings still roughly 66% higher than in 2015.
• Price Insensitivity to Sensitivity: As central banks—who buy for policy objectives rather than yield—withdraw, markets must find new buyers who are more responsive to price and interest rate levels.

The Rising Role of Hedge Funds and Leveraged Investors

A defining feature of the current landscape is the increased prominence of hedge funds, which have filled the gap left by traditional bank dealers.

• Liquidity Provision: Hedge funds now account for nearly a third of trading volumes in US Treasuries and the majority of secondary market volumes in some European markets.
• Marginal Buyers: More than half of surveyed sovereign debt management offices (DMOs) identify hedge funds as marginal buyers of their bonds.
• Market Stability Risks: While hedge funds provide vital liquidity in normal times, their reliance on high leverage and their propensity to liquidate positions during stress episodes (such as the "Liberation Day" yield spike in April 2025) can amplify market volatility.

Structural Institutional Shifts: From DB to DC Pensions

Pension funds remain critical fixed-income investors, but their behavior is changing due to the global migration from Defined Benefit (DB) to Defined Contribution (DC) schemes.

• Reduced Duration Appetite: DB schemes require long-duration bonds to match fixed future liabilities; in contrast, DC schemes prioritize higher returns and flexibility, leading to a structural decline in demand for ultra-long-term bonds.
• Shift to Corporates: The move toward DC models is also encouraging an allocation shift away from low-yielding government bonds toward higher-yielding corporate debt.

Foreign Investors and Geopolitical Fragmentation

Foreign investors remain the largest overall category of bondholders, but their demand is increasingly sensitive to global tensions.

• Major Stakeholders: Foreign investors hold roughly 28% of government bonds and 31% of corporate bonds globally.
• Geopolitical Risk: Nearly all surveyed sovereign issuers expect geopolitical risk to affect market operations in 2026. Tensions can lead to "flight home" effects, where investors reallocate funds to domestic markets or safe-haven assets like US Treasuries.
• Fragmented Demand: There is evidence that investment funds allocate smaller shares to countries that are geopolitically distant, raising concerns about the future absorption of record debt supply.

The Resurgence of Retail Investors

For the first time in over a decade, households and retail investors have become significant buyers of government debt.

• Yield Attraction: Higher interest rates since 2022 have made government bonds a competitive alternative to bank deposits for retail investors.
• Strategic Targeting: Many governments have introduced new retail-specific products, such as Italy’s BTP Valore and Lithuania’s defense bonds, to diversify their investor bases.

Implications for Issuers

This more fragmented and price-sensitive investor base has forced sovereign and corporate issuers to adapt their strategies:

• Shorter Maturities: To align with current demand, many borrowers have skewed issuance toward shorter tenors, which lowers current interest costs but increases refinancing risks.
• Flexibility Needed: DMOs are increasingly using tools like syndications and ad-hoc taps to manage supply in a market where traditional "buy-and-hold" demand has weakened.
• Vulnerability to Shocks: The combination of record issuance and a leveraged investor base means that even minor price movements can trigger self-reinforcing selloffs, challenging the current surface-level calm of global debt markets.