US government bond yields are regarded as the rate of return on a risk-free asset. So, for someone to decide to lend you money or invest in your business, you need to offer them a higher rate of return. This extra return is the risk premium. So when interest rates are close to 0 per cent, mortgages are cheap and everyone is prepared to risk their money on a slide deck promising significant losses over the next three years. Because cash yields next to nothing, investors race to generate returns elsewhere, which artificially depresses the risk premium.

If US bonds are at 5 per cent, your banker will add their margin on top and your bank loan will be at least 7 per cent or higher if they fear a rise in interest rates and inflation. Investors will be much more discerning and demand higher risk premiums to move away from risk-free yields. As there are far fewer sectors capable of offering such returns, investment will concentrate on a very small number of sectors and companies (does AI ring a bell?).

It is therefore the bond yield that affects us directly, rather than the volume of debt alone. The volume of debt does have an effect, however, as the bulk of the interest is paid by issuing new bonds. If the government repays with cheaper bonds, it isn’t too serious; but if rates rise, the impact on budget deficits is exponential.

The thing is, the more debt and interest there is to pay, the more bonds need to be sold. To absorb this huge supply, the market demands higher yields to attract buyers, which in turn drives up borrowing costs for everyone.