According to the Janus Henderson’s Sovereign Debt index, published today (4 May), global government debt rose 7.6% to a record $66.2trn in 2022, while higher interest rates meant government borrowing costs jumped 20.9% at the fastest rate since 1984.

The interest paid on sovereign debt reached a record $1.4trn last year and is set to double in the next three years. By 2025, the effective interest rate paid on government borrowing will rise from 2.2% in 2022 to 3.8%. This will cost an additional 1.2% of GDP, the firm said.

Also by 2025, global debt is set to rise by one sixth from 2022’s record levels to $77.2trn, with the global debt burden of GDP rising from 78% today to 79% in three years.

In the UK, the effect of inflation on interest payments, the Bank of England’s QE government debt portfolio and spending for energy subsidies have worsened government finances.

According to the index, Britain now owes a record £2.6trn, up 6.9% on an annual basis, with the country’s debt per person now standing at over £38,000. This will cause a further rise in the UK’s budget deficit, which will not reverse until big tax rises begin to kick in.

The picture is even gloomier in the US, which accounted for more than half of the global increase and more additional borrowing than every other country combined, with its public debt rising to $24.8trn in 2022, up 11.5% year-on-year

“Near-zero interest rates and huge quantitative easing  programmes by central banks have made such a large expansion in government debt possible,” said Jim Cielinski, global head of fixed income at Janus Henderson.

However, bondholders are now demanding higher returns to compensate them for inflation and rising risks, which is creating a “significant and rising burden” for taxpayers, he noted.

Janus Henderson expects the global economy to weaken markedly in the months ahead, and for inflation to slow more than most expect.

“The market expects the world economy to have a relatively soft landing i.e. a slowdown in growth, but no outright contraction, except in a handful of national economies,” said Cielinski.

“We believe this is incorrect, although the sheer volume of debt owed by governments, corporates and individuals nevertheless means that rates do not need to climb as far as in the past to have the same effect. The interest rate tightening cycle is nearing its end.”

According to the firm’s fixed income chief, investors stand to benefit from this as bonds of all maturities are likely to see yields fall in the year ahead, meaning prices will rise.

“Short-dated bonds offer higher yields at present because they are more closely connected to central bank policy rates. This is good for those wanting income and tolerating lower risk, but they will see less capital appreciation,” he said.

“The scope for capital gains is significantly greater for longer-dated bonds which we expect to perform very well in the next year as the economy comes under pressure.”