Some reader feedback from our last missive – ‘I am not as bearish as you’ being a common theme. This triggered us to bring out more charts from our extensive collection on the subject.
We are not here to scare, but try to warn so we are all prepared… The above view may be premised on the belief that Central Banks (CB) are able to save the market, again. But the below factors are suggesting that this time may be very different:
1) govt debt levels are already too dangeriously high
Japan debt aside, take another big OECD stalwart, France – its debt has now exploded to such levels that it is approaching Grexit Debt Crisis levels:
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The market is now so nervous about it that the spread over the Bund is higher than Grexit times (see Article 3). Of course the debt pile is not just even France’s problem alone, the developed market taken together we are at post WW2 highs already:
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The comfort and trust in sovereigns back in the early 1900s were premised on debt levels in the 40-60%s, not the 120+% we are sitting at now…
2) weak and fickle holders are all we have left
We showed how even Japan and China were lightening their treasuries load last instalment, what is more scary is how high the govt bond market is now inhabited by ultra-short term holders such as hedge funds:
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They would bolt at the first sight of trouble, meanwhile, more prudent central banks continued to amass gold in their vaults, as shown here:
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3) wars and trade wars will exacerbate inflation
The marching war drums are getting louder as more European countries plan for compulsory drafting (Article 2). Perhaps it is because of the unstable debt and wilting political support that the politicians will have no alternative but to divert attention abroad. What better excuse than the Russian bogeyman they have been counting on (but disappointed) for so long?
Wars bring more inflation, but even before the bullets fly, trade wars (what we have highlighted as deglobalisation) are already creating price volatility, as seen in the latest round of US-Canadian trade spat:
– Trump …to ban imports of some motorcycles, dairy and alcohol (Article 5);
– Canada publishes list of US products subject to counter-tariffs effective September 8, 2026 (Article 6).
Under such dysfunctional global economic, geopolitical situation, how could inflation not rise further?
3) issue competition is huge
This cycle is different from past debt crises in the sense that the most powerful, the most loaded up and cash rich companies in the world (ie the hyperscalers, the Mag7s) are competing with sovereigns for the pockets of investors amounting to hundreds of billions of bonds. One estimate puts the 2026 issuance in the long duration space at close to 70% of the size of Treasury issuance:
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No wonder the yields are spiking everywhere, here is 10y TB:
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4) confidence is already lost, we are in finale
We know the market’s confidence in the sovereigns are gone when you see rates rise while economic indicators tank – below the blue arrows and red arrows move in lock step in the good old days… until the market realises that bad economy can no longer be saved by rate cuts, and that whatever the CBs do beckons even more selling (and higher yields):
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All the theatrics that the govts can throw at the problem (see Bessent’s “I am the house now” claim, Article 1) is not going to work, because people see that rotating long duration into bills is akin to taking poison, as the cycle is now out of control:
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Whatever short term reprieve will likely be a short opportunity… a bit like Soros adding his bets everytime the UK asserted that the pound was safe.
Why the private sector is safe this time?
Because this time the crisis is not in the corporate or household sector, for example, the US household sector has improved its liability ratios for most of the past 2 decades:
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Of course, we need to beware whether these households are overly long on potentially toxic AI investments…
We know that corporate balance sheets are also in sound shape, and that is why in the next debt crisis, it will not be the Corp-less-govt spread blowing out, like in past crises (blue arrows), but could be a complete opposite (red arrow):
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Some govts are in much better shape (eg most of Asian jurisdictions), which allows bond issues there to still garner good demand (eg HK’s Silver Bond, at 4.25% guaranteed yield, see Article 4). But we know high inflation could clip these what seem to be generous levels, so we would even avoid better quality bonds, and go straight to real hard assets, anything that the bankrupt issuers (including currencies) cannot print…
Article 1: The Treasury Is Now Supporting Its Own Debt Market
https://www.armstrongeconomics.com/armstrongeconomics101/economics/the-treasury-is-now-supporting-its-own-debt-market/
Article 2: Army to mobilise veterans in preparation for war
https://www.telegraph.co.uk/news/2026/09/07/army-to-mobilise-veterans-war-preparation/
Article 3: France’s debt crisis-in-waiting
https://www.ft.com/content/16081c0e-5471-4c00-8b12-29cac20a69d2?syn-25a6b1a6=1
Article 4: The 11th Silver Bond draws record applications in both number and value
https://www.thestandard.com.hk/finance/article/341899/
Article 5: Trump escalates trade war with Canada, moving to ban imports of some motorcycles, dairy and alcohol
https://www.nbcnews.com/business/economy/trump-escalates-trade-war-canada-moving-ban-import-autos-dairy-alcohol-rcna596666
Article 6: List of products from the United States subject to counter-tariffs effective September 8, 2026
https://www.canada.ca/en/department-finance/news/2026/08/list-of-products-from-the-united-states-subject-to-counter-tariffs-effective-september-8-2026.html
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