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U.S., Japan debt worries at top of list

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France and UK still a concern but less so than last year

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Worries over high-debt Italy ebb, for now

By Stefano Rebaudo, Linda Pasquini and Yoruk Bahceli

LONDON, June 3 (Reuters) - Surging government debt

levels are becoming a pressure point for big economies and bond

investors have their sights on those not doing enough to improve

their finances.

A Moody's decision to strip the United States of its last

triple-A credit rating last month and weak demand for Japanese

auctions moves attention to two of the world's biggest

economies.

A debt crisis may not be the base case, but warning bells

are starting to ring. Here's a look at who's in the spotlight

for markets and why:

1/ USA

The United States has shot to the top of the worry list

after a sharp bond sell off in April. Adding to concerns is

President Donald Trump's tax and spending bill, which could add

roughly $3.3 trillion to debt by 2034, according to nonpartisan

think tank the Committee for a Responsible Federal Budget.

The Moody's decision is another blow, while JP Morgan CEO

Jamie Dimon warns of a "crack in the bond market" partly due to

overspending.

Its status as the world's No.1. reserve currency offers the

U.S. some protection and Treasury Secretary Scott Bessent says

the country will never default.

And investors reckon authorities will prevent 10-year

yields, the benchmark for borrowing costs for companies and

consumers, from rising too far above 4.5%.

The banking industry is optimistic that U.S. regulators

could soon revamp the supplementary leverage ratio, potentially

reducing the cash reserves banks must hold and encouraging them

to play a larger role in Treasury market intermediation.

2/ Japan

For years Japan was the textbook case of how markets could

shrug off a mammoth debt pile. Now that's changing.

Japan's public debt at more than twice its economy is the

biggest among developed economies.

Its longer-dated bond yields

hit record highs in May after a 20-year bond sale resulting in

the worst auction result since 2012 cast doubt on demand.

Thirty-year borrowing costs have jumped 60 basis points (bps)

over the last three months, even faster than in the U.S.

The culprit: waning demand for longer-dated paper from

traditional buyers like life insurers and pension funds at a

time when the bond holdings of the Bank of Japan, which holds

roughly half the market, fell for the first time in 16 years.

Prime Minister Shigeru Ishiba meanwhile faces pressure for

big spending and tax cuts. Policymakers are already considering

trimming super-long bond sales, temporarily soothing market

concerns.

Still, another poor auction last week suggests they may be

deeper rooted.

"The weak Japanese auctions are a symptom that something is

happening underneath," said Nordea chief market strategist Jan

von Gerich.

3/ UK

In Europe, Britain, with debt near 100% of GDP, remains

vulnerable to global bond selloffs even as it stresses fiscal

discipline.

Finance minister Rachel Reeves' multi-year spending review

next week could be the next test for the only G7 economy with

30-year borrowing costs above 5%.

The government appears prepared to spend more on defense and

health, among others, Rabobank strategist Jane Foley said, even

as it pledges not to increase taxes and keep spending tight.

The IMF urged Reeves to stick to plans for lower public

borrowing.

An earlier end to active Bank of England bond sales would

potentially support the gilt market, said Sam Lynton-Brown,

global head of macro strategy at BNP Paribas.

4/ France

Pressure in France's bond market, driven last year by

concern that political instability would hamper belt tightening

efforts, has abated.

The risk premium investors demand for holding French debt

over Germany's has eased to around 66 bps from 90 bps in

November.

Furthermore, investors have positioned for a drop in euro

area risk premiums, helped by expectations that European

countries will step up cohesion on areas such as defense.

Still, caution is warranted. Prime Minister Francois Bayrou

plans to announce a four-year deficit-cutting roadmap in July,

which could set the scene for budgetary warfare in parliament.

"France has not had any improvement on the debt side since

the COVID crisis," said Carmignac fixed income fund manager

Eliezer Ben Zimra.

5/ Italy

Italy has moved down the worry list thanks to increased

political and economic stability and improved creditworthiness.

Its budget deficit dropped to 3.4% of output in 2024 from

7.2% in 2023, and is forecast to fall to 2.9% in 2026, matching

projections for Germany, noted Kenneth Broux, head of corporate

research FX and rates at Societe Generale.

"This was unheard of many years ago."

Broux said that while Italy still has challenging long-term

debt dynamics, a relatively better performance compared to

countries such as France and diversification in favour of

European assets supported its bonds.

The Italy/German 10-year bonds yield gap is

near its narrowest since 2021 at just under 100 bps.