High oil prices have been the clear trigger for the bond-market rout gripping countries around the world. But how important were debt levels as a background risk factor?

This remains a debated point in financial markets. Looking solely at U.S. markets, for instance, many analysts have argued that it is primarily inflation expectations-and the resulting anticipation of tightening by the Federal Reserve-that have driven yields higher.

The upward move of the last couple of weeks, however, can't entirely be explained by this. The extra amount of return that investors are demanding to own longer-term bonds is rising beyond what would be explained by movements in short-term rates, according to calculations by the San Francisco Fed. This suggests other concerns are weighing on investors' minds.

Moreover, the inflation explanation doesn't account for why some countries like France have seen particularly huge surges in yields. Everyone around the world, after all, is facing the same global oil shock.

A quick analysis of the major industrialized Group of Seven economies suggests that debt levels have played a significant role. This indicates that while an oil-price shock might have acted as the spark for the bond selloff, accumulated debts are the dry fuel causing the blaze to get out of control.

Over the course of the third quarter, the yield on 10-year U.S. Treasurys jumped by 0.83 percentage point, according to FactSet, the biggest quarterly increase since 1994. Two other countries in the G7, France and Italy, saw even bigger leaps in their 10-year bond yields at 1.29 and 1.28 percentage points, respectively.

Italy had the highest debt load of the group at 149% of GDP in 2025, according to data from the Organization for Economic Cooperation and Development. That compares with 126% in the U.S. France isn't far behind at 117% of GDP, and the concern now is that figure could balloon under a far-right or far-left future president.

By contrast, three countries with significantly smaller debt-to-GDP ratios than the U. S.-Germany, the United Kingdom and Canada-all saw smaller jumps in sovereign yields.

Of course, debt levels weren't suddenly higher in the third quarter than in the second. But in markets, a risk factor can't matter for a long time until it suddenly does.

Often this occurs when some new factor makes a condition feel acute. In this case, that was the Iran war and oil prices. But even if these are resolved soon, it might be hard for investors to move their minds back off debt levels, especially in the more heavily indebted markets.

That could leave rates higher for longer, even if they retreat somewhat from recent yield peaks.

Each country also has its own important factors to consider. Canada is a major exporter of oil, albeit mainly to the U.S. where it is facing trade ructions. In France, political risks are front of mind for many investors. But the overall pattern is clear: Higher debt levels have meant a worse fallout for bond prices.

The notable outlier is Japan, which has the highest debt ratio in the group and-despite all the negative headlines the country garners-also saw the smallest jump in 10-year yields at around 0.4 percentage point in the third quarter.

There are important caveats to consider. Japan's gross debt looks huge at over 200% of GDP. But this fails to take into account the central government's large financial holdings, including forex reserves and other investments. Net of these, Capital Economics figures the debt to GDP ratio will be 109% of GDP in 2027, its lowest level since the financial crisis.

And its annual deficit is actually the lowest in the group. In 2024, the last year with full data available for all seven countries, Japan's central government deficit was 1.7% of GDP, according to the OECD. That compares with an average of 4.7% for the rest of the G7. So Japan is acting the most responsibly at the moment, whatever its past sins.

What all this means for investors is that politics must be on their radar more than usual. Countries that are able to present markets with credible plans to manage debt and reduce deficits are likely to suffer less bond-market turbulence in the months ahead, whatever oil prices do.

Unfortunately, that group of countries is unlikely to include the U.S.