Developed economies are experiencing a synchronized and severe sell-off in government bonds, pushing 30-year yields to levels not seen since before the 2008 financial crisis. This coordinated move suggests investors share uniform concerns about the fiscal and inflationary outlook across the developed world.
Investors are losing faith in the fiscal discipline of major economies, which continue to run large deficits (e.g., US at 6% of GDP) long after the COVID crisis. This is fueling fears that governments will be tempted to inflate away their massive debt piles, eroding the traditional safe-haven status of their bonds.
The traditional distinction between developed (G10) and emerging markets (EM) is blurring. G10 countries are exhibiting vulnerabilities once typical of EMs, such as a currency falling alongside rising bond yields, while some EMs have demonstrated superior policy discipline in fighting inflation.
While the bond market signals significant distress over inflation and fiscal health, equity markets remain relatively optimistic, buoyed by the AI narrative and a belief in a 'central bank put'. The valuation gap favoring bonds over stocks has widened to its largest since 2002, yet equities have not significantly corrected.
Keep pulling the thread on The Great Bond Car Wreck.