Markets, birth-rates, watchdogs: the evolving fiscal constraint in advanced economies

Over the past 5 years, the policy constraint posed by the sovereign bond market has strengthened. Across the G7, governments have been forced into rapid policy reversals, often due to sharp and unexpected rises in bond yields. The fact that the bond market acts as a constraint on policy—particularly on long-term investment—is well known. What has become apparent is that this market constraint has sharpened and now shapes G7 policymaking outside periods of acute crisis. This paper examines the bond market constraint, and how it has evolved in recent years. The past 5 years have seen a striking evolution, with record levels of G7 debt issued. Focusing on the United States and the United Kingdom, we outline two key empirical puzzles: first, for both, bond yields appear higher than justified by benchmark models; second, in the United Kingdom, yields have become highly (and surprisingly) volatile. We then review candidate explanations for these changes. We posit and examine new forces—demographic shocks, news coverage of fiscal watchdogs, the role of hedge funds and stablecoins. Finally, we use a simple econometric framework to provide a first test of whether these forces may explain bond yields. We find indicative evidence that they do. However, much remains unexplained, suggesting the importance of further work to understand the implications of the higher debt costs across the G7. As part of this analysis, we introduce a new dataset of fiscal watchdog media salience and publication patterns, which we make available to support future research.