There is developing talk of a “global bond market crisis.” That’s an overstatement, but the bond market is certainly sending major economies around the world a message. That message is that many major economies are on an unsustainable fiscal trajectory. A related message is that we should expect inflation to be higher for longer than previously thought.

Yields on long-term government bonds have been rising recently. There was a particularly sharp takeoff in the last two weeks of August.

As of early September 10-year bonds in Australia were trading at a yield of nearly 5.2 per cent, the highest rate in 15 years. In the UK the 10-year was at 5.13 per cent, just off a 19-year high. And at 4.80 per cent, the US 10-year rate was close to the highest level since before the 2008 financial crisis. There are similar stories in Germany and Japan.

All of this reflects concerns about government debt and fiscal sustainability – the US - the US just passed US$40 trillion in debt – and the prospect of elevated and sustained inflation.

These concerns are well founded. Net debt as a proportion of GDP is around 100 per cent in the US and UK. Germany is at 50 per cent. Australia is more like 32 per cent, and New Zealand’s is close to 25 per cent. Australia’s, New Zealand’s, and Germany’s levels are manageable, and the US enjoys the so-called “exorbitant privilege” of issuing the world’s reserve currency. The situation in the UK is just bad.

More concerning is the fiscal trajectory in nearly all major economies. Budget deficits range from north of two per cent in Australia and Germany, to more than four per cent in the UK and more than six per cent in the US. A common thread among major economies is the absence of a plan for fiscal sustainability.

Bond markets are sending an unmistakable message. Inflation is going to be higher for longer. Debts are becoming unsustainable. The safest of safe governments are now riskier propositions. This is not at the point of becoming a modern-day bank run on entire economies as occurred in Greece in 2015. But it’s concerning news.

Even though the 10-year bond is not directly relevant for variable rate mortgages in Australia, the rise in yields will still ricochet throughout the economy. For larger corporates who borrow at 5-year plus maturities the increase translates directly into a higher cost of borrowing, which makes investment less attractive. Those looking to take out fixed rate mortgages will be similarly affected.

Even variable rate mortgages will be affected relative to the previous perceived path. Higher 10-year rates imply market expectations of a sequence of higher short-term rates. If you thought mortgage rates were going to come down you might be right, but the bond market disagrees with you.

A well-known fact in behavioral finance is that markets sometimes overreact to information. It could be the case that bond markets are doing that at present. But the way bond markets are reacting to fiscal sustainability issues certainly looks rational—there’s a legitimate concern at play.

What remains to be seen is whether bond markets will essentially “calm down” or whether they will “double down.” It’s the latter scenario which would be truly concerning. It could have real implications for the stability of the global financial system.

As we saw in 2008, when seemingly obscure and little-known mortgaged backed securities triggered the global financial crisis, dislocations in financial markets can trigger unforeseen and wide-ranging problems. Once contagion gets started it’s hard to stop in an orderly fashion.

That is not overwhelmingly likely on this occasion. This is probably more a case of an early-warning signal from markets. But major economies around the world are pushing their luck when it comes to a lack of fiscal sustainability.