Government bond yields and term interest rates have been rising globally over the last month or so as the risk appetite of investors has increased, as reflected in rising equity markets. The other driver has been fixed-income investor concern over increasing government bond supply. Just last week, the British government declared in its 2009/10 budget that it will issue £220 billion of bonds to fill a gaping hole that amounts to 13 per cent of that country's GDP. Back home, gaping holes are appearing in federal and state budgets too. The Australian government is now possibly looking at a borrowing requirement over the next four years that will exceed the $200 billion limit set in February. The Victorian government is expected to announce a 70 per cent increase in its borrowings from recent projections, in its budget to be released next week. Debt is now expected to reach $16 billion by 2012, as infrastructure spending is maintained while revenues fall. To date in Australia, yields on three-, five- and ten-year benchmark government bonds have risen from mid to late January lows by more than one percentage point. Interest rate swaps have not increased by quite as much, as swap spreads have compressed.Nevertheless, the three-year swap rate has increased to around four per cent from an early March low of 3.3 per cent and the five-year rate is currently around 4.6 per cent, up from an early February low of 3.8 per cent. This is why the banks have recently increased fixed term mortgage rates. There is a direct link between swap rates and term mortgage rates, as the banks use the swap market to hedge their exposures. The situation was exacerbated in New Zealand when three- and five-year swap rates increased over the same period by as much as 1.25 per cent, in the case of the five-year swap rate. This is why there was such an outcry when the banks started pushing up mortgage rates there, bearing in mind that mortgage rates in New Zealand are typically fixed for two years at a time or longer. This has been the downside of rising term interest rates. Possibly on the upside is the argument that rising yields will reinvigorate the corporate bond market. The argument being put forward is that investors have a minimum yield requirement and will return to the corporate bond market when this can be met. As underlying government bond yields and swap rates move closer to that level, credit spreads can compress and issuers will be encouraged to return the market. Voilà - instant recovery!