The total value of outstanding government and corporate bonds worldwide exceeded $100 trillion last year, according to a report by the Organisation for Economic Co-operation and Development (OECD) released on Thursday.
As interest costs continue to rise, borrowers—both governments and corporations—face tough financial decisions, needing to prioritize investments that drive long-term growth.
The OECD, an intergovernmental economic organization with 38 member countries, monitors global economic trends, providing policy recommendations to foster economic stability and growth. Its latest global debt report highlights the increasing burden of interest payments on governments, which reached 3.3% of GDP in OECD member countries—higher than their collective defense spending.
Between 2021 and 2024, the share of interest costs relative to economic output rose from a 20-year low to a record high. While central banks have begun easing interest rates, borrowing costs remain significantly above pre-2022 levels.
As a result, existing low-rate debt is gradually being replaced with more expensive financing, pushing overall interest expenses even higher.
Governments worldwide are grappling with escalating spending commitments. Germany, for instance, recently approved a substantial investment plan to modernize infrastructure and support European defense initiatives. Meanwhile, major economies continue to face long-term financial pressures from demographic shifts and the transition to greener energy sources.
The OECD warns that the combination of higher debt levels and rising interest costs may constrain governments’ ability to finance new investments. Despite these challenges, the report notes that interest rates on government and corporate debt remain lower than market rates for a significant portion of OECD member states and emerging economies.
However, nearly half of government debt in OECD countries and emerging markets, along with one-third of corporate debt, is set to mature by 2027, increasing refinancing risks.
The burden is particularly heavy on low-income, high-risk nations, where over half of government debt is due for repayment within the next three years. These economies face significant refinancing risks, with more than 20% of their debt maturing this year alone.
The OECD advises that both governments and corporations ensure their borrowing is directed toward productivity-enhancing investments rather than short-term financial maneuvers.
Since the 2008 financial crisis, many corporations have prioritized debt-financed refinancings and shareholder payouts over direct investments in business expansion, a trend the OECD finds concerning. For emerging markets that rely on foreign currency borrowing, the organization emphasizes the importance of developing local capital markets to reduce reliance on external funding.
The report highlights that the cost of borrowing through U.S. dollar-denominated bonds has risen sharply, from around 4% in 2020 to over 6% in 2024. Riskier, junk-rated economies now face borrowing costs exceeding 8%.
These nations often struggle to tap into domestic savings due to low national savings rates and underdeveloped financial markets.
In addition to financial risks, the OECD stresses that securing funding for the transition to net-zero emissions remains an “immense challenge.” At current investment levels, emerging markets outside China could face a $10 trillion financing gap by 2050 to meet the goals of the Paris Agreement.
If governments finance these additional investments themselves, debt-to-GDP ratios in advanced economies could rise by 25 percentage points, while China’s debt burden could increase by 41 percentage points. Alternatively, if funded privately, energy companies in emerging markets outside China would need to quadruple their debt levels by 2035.
Amid these financial pressures, the composition of government debt ownership is shifting. Central banks have scaled back their bond holdings, with foreign investors and households stepping in. Foreign investors now hold 34% of OECD economies’ domestic government debt, up from 29% in 2021, while household holdings have risen from 5% to 11%.
However, the OECD warns that these investment patterns may not be sustainable. Rising geopolitical tensions and increasing global trade uncertainties could lead to sudden shifts in investor sentiment, potentially disrupting international capital flows and exacerbating debt challenges worldwide.
