While such risk premiums in principle are desirable since they provide governments with incentives to reduce debt, the fact that interest rates have risen dramatically and unexpectedly has complicated the management of the crisis in many countries. A particular concern arises from the risk of vicious circles developing. Suppose long bond yields rise.
Since treasury yields serve as reference points for many other interest rates, this would lead to a generalised increase in interest rates and therefore a slowing of the economy (Smets and Trabandt 2012). In turn, lower growth will worsen further the outlook for public debt, and risks triggering additional increases in yields.