New UK Prime Minister Liz Truss in September last year sanctioned a mini-budget funded by borrowing that included energy-price guarantees and large surprise tax cuts for companies and individuals, especially for the highest paid.

Investors were aghast that macroeconomic policy was at cross-purposes – fiscal stimulus would stir the inflation of 10 per cent the Bank of England was seeking to smother. The price of longer-dated bonds plunged a daily-record 30 per cent (which means yields soared). When 30-year gilt yields breached five per cent from 3.8 per cent the previous day, the BoE bought bonds and thereby created a schizophrenic monetary policy, one part tightening, another loosening. The central bank acted to stop a financial system crash being triggered if super funds failed to meet margin calls over busted derivative plays – their ‘liability-driven investments’ were bets rates would stay low. Mortgage rates jumped, to negate the fiscal stimulus.

Three things stood out amid the turbulence on financial markets. One was incompetence gets punished. Within days, Truss was forced to abandon the politically fraught elements of the mini-budget and she soon resigned. A second notable event was a safe part of the financial system unexpectedly melted.

The third revelation was the most significant and, in fact, drove the other two reactions. The end of quantitative easing, or central bank asset-buying, meant bond investors had regained their power to intimidate borrowers. Bond investors are buying a series of repayments. Absent central bank meddling, they prioritise expected inflation and the creditworthiness of borrowers when valuing longer-dated bonds – cash rates hold more sway on bonds out to three years.

The reappearance of ‘bond vigilantes’ is undeniable now. In recent weeks, yields on the consequential US 10-year Treasuries soared to 5 per cent, the highest since 2007. Yields on eurozone government debt ascended to their highest in 10 to 12 years, while UK bond yields hit 25-year highs. Australian 10-year government yields climbed to a 12-year high of 4.8 per cent. That yields have jumped after inflation slowed means real yields are rising – investors are thus demanding greater return for risk.

Bond yields are soaring for at least eight reasons. The first is resilient economies are cementing inflation above targeted rates. Central banks are under pressure to raise key rates and hold them ‘higher for longer’. Another is that investors are punishing indebted governments that are running endless fiscal deficits. A third concern are doubts US Congress can pass the money bills required to avoid a government showdown, especially now the House of Representatives is paralysed since its speaker was voted out for the first time. A fourth explanation is oil prices have surged on production cuts.

A fifth reason is that central banks are selling bonds (‘quantitative tightening’) to ‘normalise’ balance sheets bloated by quantitative easing. They need to limit losses borne by taxpayers that arise from the shortfall between their income (the low rates on the bonds they own) and their expenses (the higher rates they now pay on bank reserves).

A sixth cause is Japanese investors are repatriating capital to benefit from Japan’s humming economy and surging stock market – up 20 per cent since March. The flows back to Japan could increase if higher local yields force the Bank of Japan to abandon its cap on Tokyo’s 10-year bond yield. Another reason is countries are selling US Treasuries to stem the decline of their currencies against a rising US dollar. An eighth explanation is US rivals are shunning US Treasuries because Washington has weaponised the US dollar-based financial system.

Higher bond yields will hurt the world. As rising government yields boost interest rates for governments, businesses and consumers, including mortgage rates, they could pummel countries into recession. A second worry is higher yields strain banks by extending (unhedged) unrealised losses on the bonds they hold as assets. This forces them to restrict lending.

Another concern is bond investors will intensify their torment of countries that might struggle to repay loans. They will punish countries with hapless leaders, large current account deficits because they need to borrow from foreigners, undiversified sources of export earnings (know any China-dependent countries?) and indebted eurozone members. Users of a common currency have a higher default risk because they cannot print money to repay debts.

Another angst is the likelihood of booby traps laid by promiscuous monetary policies. Possible time bombs? The under-regulated shadow banking system can be subject to bank runs. Lenders overly rely on government bonds as collateral because it’s easier than performing credit assessments. Derivatives markets can turn safe assets unsafe. Risk metrics and risk-reduction strategies can amplify selling. Defaults are possible in the corporate bond market. Commercial property values are falling due to working from home. These are just some non-bank sources of systemic risk.

The reappearance of the bond enforcers makes possible contagion. A series of crises is feasible because there’s too much debt in the world. Business, consumer and government debt has soared to about to 350 per cent of global GDP compared with about 200 per cent in 2014.

The post-pandemic world is dogged by above-target inflation, rising interest rates, a strong US dollar, an energy crisis, deglobalisation centred around a China-US split, Europe’s first land war since 1945, renewed conflict in the Middle East, a stalling Chinese economy, struggling emerging countries and snookered policy makers.

Officials are hamstrung because governments have largely exhausted responsible fiscal prodding. Yet austerity would only worsen debt ratios by crunching economies. When debt is so high, central banks can’t lift rates enough to tame inflation without risking a financial crisis. Yet if they don’t address inflation, longer-dated bond yields will surge more. The Western debt-fuelled economic model is cracking.

It must be pointed out, the doomsdayers have been endlessly wrong, especially about excessive debt. But they won’t be forever. A stock market crash or an economic slump could lower yields. Hardly comforting. Policymakers could prove wizards. Difficult to see how.

The world has endlessly borrowed while aware that debt-based economic models eventually confront their nemesis of high interest rates. Recalling the tumult of her weeks atop the UK, the calamity that higher bond yields could unleash is already known as a ‘global Liz Truss accident’.