When a company and a government has very high default risk, the bonds issued by such company or government have to have high yields to attract investors, institutions and other governments to buy their bonds. However, a government with a weak financing ability is likely to fall into a debt trap.
When the yield increases, it means the amount of the government has to pay also increases, it adds more burden on the government. Usually the change in the bond market is an act in the financial market and caused by short-term effects; however, when a government is facing a serious financial difficulty, the situation of high yields is very likely to be a long-term issue. When the yield is high, the risk of default is also high. Because when a government has a financial difficulty, it usually implies the government does not have the support from its domestic economy and the investment and consumption does not efficiently generate enough incomes and taxes, the way for a government to pay back more bonds is austerity. However, austerity has been proved to be ineffective to encourage economic growth and tax growth many times during our history. Therefore, an increase in the bond yield will add more burden on the government and reduce its ability to generate more growth and tax incomes, and this will lead to a further increase in the bond yield.
Therefore, I think when a bond yield is higher than another bond yield, its time to maturity should also be longer, especially towards a government. This is because I believe, unlike companies which could bankrupt very suddenly, governments could face some financial difficulties, but because of foreign aids and trading, a government which does not have any wars (including civil wars) is more secure in the long term, as for a government, sometimes its limitation is time, and giving it more time could help the government to make more policies to encourage economic growth and wait for the boom period of the economic cycle.
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