Global Navigator from KPMG Economics
The Great Repricing of Capital
Government debt is competing with private offerings.
October Edition
October 15, 2026
The cost of capital has reset higher, with long-term rates near or topping multi-decade highs in several major economies, ending the unusually forgiving financing environment in the aftermath of the Great Financial Crisis (GFC). A higher expected path for short-term rates, renewed compensation for holding long-duration debt. At the same time , unusually heavy public and private borrowing are keeping financing costs elevated. For businesses, that raises hurdles, makes refinancing more expensive and puts greater pressure on cash flow, margins and capital allocation.
This edition of Global Navigator traces those forces through three channels: the structural shift in interest rates, the surge in sovereign and AI-related debt issuance, and the spillovers from U.S. monetary policy to global capital markets. The adjustment will not be uniform. Borrowers with near-term refinancing needs, weak cash flows or limited policy room will feel it first. Governments, businesses and investors must now make decisions in a world where money is more expensive and less forgiving.
Written by Ben Shoesmith and Valentina Skryabina.
Three big themes
- Rates heading higher. Governments, firms and consumers now face a structurally higher interest rate environment. The low rates of the 2010s were an anomaly, not the norm.
- The supply deluge. Extraordinary levels of sovereign and private borrowing are creating a wave of debt issuance that is flooding global markets. Refinancing existing debt at elevated interest rates raises interest expense obligations. In the US, this is the fastest rising line item adding to the government debt and deficits.
- Spillovers increase EM vulnerabilities. Unexpected changes in the Federal Reserve’s policy increase the probability of financial crises in emerging markets (EMs). Latin American EMs are more sensitive than Asian EMs due to higher interest burdens relative to GDP.
Rates heading higher
Following the necessary liquidity injections to recover from the GFC, businesses operated in a world where low interest rates could mask financial and operational inefficiencies. Less productive companies could access cheap capital to stay afloat. That era is ending amid a series of successive shocks.
Higher neutral rates, rising term premia and growing sovereign borrowing needs are pushing up financing costs and forcing companies to rethink how they evaluate risk, investment and debt. Inflation expectations remain fairly well anchored, but the recent inflation stemming from the conflict in the Middle East has created upward pressure on yields. The upward shift in rates means business investments that once cleared hurdles may no longer do so. The rules of the game have changed: Money is now expensive.
Upward shift to neutral rate estimates
The low rate world that followed the Global Financial Crisis increasingly looks like the exception rather than the rule. The neutral rate is the inflation-adjusted short-term interest rate when the economy is operating at full employment with stable prices. Changes in the neutral rate occur over time; they are structural, not cyclical.
The neutral rate has moved higher on broad productivity growth and surging investment, in part from AI related spending. Boomerang economic growth coming out of the pandemic spurred additional upward movement in the neutral rate.
Central banks have judged that their respective neutral rates have risen. Policymakers at the Fed marked up estimates by more than one-half of a percentage point over the last two and a half years. That means monetary policy may not be as restrictive as previously gauged. When the policy rate falls below neutral, it is considered stimulative.
Term premia are back
Debt markets and term premia explain why rates may stay elevated. The term premium is the compensation investors require to lend long term.
Term premia rise when investors demand greater compensation for inflation, the growing supply of debt and the growing repayment risk associated with ballooning debt.
Could this be the return of the bond vigilantes? As the pile of sovereign debt swells, markets are assessing fiscal uncertainty. The subsequent pressure on central banks to keep the policy rate low is evidence of fiscal dominance, which is when monetary policy is beholden to fiscal policy.
Federal Reserve Chairman Kevin Warsh has previously indicated his preference to unwind the Fed’s bloated balance sheet. However, pursuing a runoff would increase the supply of debt in the market and strain the financial system’s plumbing. That would pressure banks to decrease lending and threaten their ability to absorb new Treasury issuance.
Central banks control the short end of the yield curve, while investors control the long end. That means that even if central banks cut rates, higher term premia can keep long-term borrowing costs elevated. Companies planning long-term investments should focus not only on policy rates but on market-imposed risk premiums.
Chart 1: 10-Year Government Bond Yields
The supply deluge
The sheer volume of new global debt issuance, at a time when investors are becoming more selective, is overwhelming the market and pressuring yields higher. Increased defense spending, industrial policy initiatives, aging demographics, green projects in some countries and deficit funding all bear some of the blame. Refinancing existing debt is becoming more expensive.
The phenomenon is not bound by region or stage of development. US government debt liquidity is low and distorting issuances; recent debt auctions have not gone smoothly. Japanese debt auctions have experienced similar difficulties. Germany has gone so far as to work around its vaunted “debt brake,” relying on off budget special funds.
Even before the recent run-up in US government bond yields, the country was expected to add about $24 trillion in debt held by the public by 2036, according to the Congressional Budget Office (CBO). That will likely be funded via new issuances.
Debt refinancing becomes more rate sensitive
As existing, cheaper debt is refinanced at higher rates, interest payments are becoming more burdensome. In OECD countries, 10-year yields are running about two percentage points above maturing debt yields in 2023.
Chart 2 shows the continuous, steady rise of global debt, in both emerging and mature economies. The global government debt to GDP ratio is approaching 100%. In the US, the debt held by the public now exceeds the national output for the first time since World War II.
In the face of a steepening yield curve, the US Treasury is issuing more short-term debt, now at 22% of debt outstanding. That is above the preferred range by the Treasury Borrowing Advisory Committee. The share could rise to one-quarter of outstanding debt, as estimated by T. Rowe Price.
This strategy counters the historical approach of predictable issuance volumes along the yield curve. Even during the low rate era of the 2010s, the Treasury did not primarily issue long-term debt. That norm is being tested.
The Treasury is expected to refinance a record nearly $10 trillion of maturing securities in FY 2026. Short-term securities typically carry lower interest rates but must be refinanced more frequently, upping the risk of rates rising.
According to the CBO, in the US, net interest costs reached nearly $1 trillion, almost tripling from 2020 and accounting for a record 3.2% of GDP. Interest is projected to top $2 trillion by 2036. That is the same size as the entire GDP of South Korea or Spain. Small changes in interest rates now have outsize effects on US interest costs.
Adding to the challenge, governments are no longer competing only with each other. They are competing with the private sector for capital.
Chart 2: Government debt has increased by 400% since 2000
Debt (LHS): $ Trillions Debt to GDP Ratio (RHS): Percent
Corporate debt & the AI buildout
The AI buildout has prompted a surge in corporate debt issuance. Hyperscalers, the largest companies spurring on the AI boom, issued $121 billion in 2025 and may reach $175 billion in 2026, according to Bank of America. These AI behemoths’ share of corporate bond proceeds more than quadrupled in recent years.
Corporate yield spreads may widen over the next few years as the demand falls short of fresh supply hitting the market. A wall of cash supported demand up to this point.
Once investing capital runs low, interest expense will rise and compress margins, even for non-AI companies. Another concern is demand for tech debt cannibalizing Treasury debt demand, or crowding out, which would push government bond yields even higher.
Spillovers deepen EM vulnerabilities
EMs are importing US monetary policy. The probability of financial crisis in EMs doubles when an unexpected shock to the Fed’s policy stance pushes up two-year US Treasury yields by a quarter-point, according to the World Bank. Significant increases in 10-year yields and sovereign spreads, declines in capital flows, a depreciation of the real exchange rate and a rise in short-term yields add up.
International Monetary Fund survey evidence from 25 EM central banks shows that policymakers view increasing US interest rates as a trigger for currency depreciation via pulling capital toward US dollar assets. The majority stated that they would respond to a US rate hike by raising domestic rates.
These notable spillovers increase EMs’ borrowing costs; subsequent declines in fixed investment and private consumption expenditures follow. For businesses, these spillovers compound currency exposure, raise local borrowing costs, weaken demand and reduce the value of earnings repatriated to the parent company.
Latin American EMs are more dependent on Fed moves because their debt servicing costs are higher than other EMs. Their interest expense as a share of GDP is nearly double that of Asian EMs.
The low rate era that defined much of the last fifteen years can be seen in the rearview mirror.
Benjamin Shoesmith
KPMG Senior Economist
Bottom Line:
The low rate era that defined much of the last fifteen years can be seen in the rearview mirror, not on the horizon. Higher neutral rates, rising term premia and surging sovereign and private borrowing are pushing the cost of capital higher around the globe. Investors retain options, while governments are competing for funding and policy decisions in major economies.
The implications extend beyond bond markets. Financing costs, refinancing risk and investment decisions are becoming more sensitive to interest rates. Managing debt now requires a holistic viewpoint in a world where capital is more expensive and less forgiving.
Global Forecast: Regional Outlook
Global growth is projected at 3.1% in both 2026 and 2027, down from 3.5% in 2025 on a purchasing power parity basis. The forecast has been revised since June amid higher oil prices and persistent disruptions to infrastructure and shipping routes.
Global inflation is expected to rise, reaching 4.5% in 2026 and 3.9% in 2027 from 3.8% in 2025. The prolonged energy shock keeps inflation elevated as supply chain pressures and shortages of refined products drive further pass-through from energy prices to core inflation.
- Growth in Asia is forecast to remain flat at 5% in 2026 before slowing to 4.7% in 2027, from 5% in 2025. It remains supported by the AI investment cycle driving demand for semiconductors, electronics and related infrastructure. Despite weaker domestic consumption, China is strengthening trade with Asian economies. India has diversified its oil supplies and benefited from stronger export demand for refined petroleum.
- Growth in Europe is expected to ease to 1.3% in 2026 and 1.5% in 2027, from 1.6% in 2025. Domestic demand remains relatively resilient, while investment is supported by infrastructure and defense spending, as well as AI-related investment.
- Growth in the Middle East and Africa is set to drop to 1.7% in 2026 before rebounding to 4% in 2027 from 4.2% in 2025. The energy shock is proving persistent. The UAE and Qatar have limited capacity to reroute hydrocarbon exports. Saudi Arabia maintains resilient domestic activity thanks to more diversified energy and logistics infrastructure.
- Growth in North America is forecast to slow slightly to 2.1% in 2026 and 2% in 2027, from 2.2% in 2025. The surge in AI investment, including in the energy infrastructure to power data centers, is supporting the US economy. Trade policy uncertainty related to the USMCA review and ongoing tariff tensions continue to constrain growth across the region. The Fed’s recent rate hike is tightening financial conditions across the region, putting pressure on currencies and borrowing costs.
- Growth in Oceania is expected to pick up to 2% in 2026 and 2.1% in 2027, from 1.8% in 2025. Australia’s underlying inflation started to ease while GDP growth is supported by investment in data centers. New Zealand’s recovery is backed by resilient export demand, while household spending is expected to gradually increase.
- Growth in South America is forecast to slow to 1.9% in 2026 and 2.5% in 2027, from 3% in 2025. Brazil’s economy is softening as weak services and industry outweigh improving agriculture; this month’s election may create a policy swing. Oil export gains are projected to fade in 2027. Policies in Chile, Peru and Argentina are encouraging foreign investment.
Global Outlook Forecast - October 2026
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