Author：Currency Explorer
The global economy is currently at a peculiar juncture, which foreshadows...The bond market will face severe challenges in the coming years..
The fiscal situation in advanced economies is deteriorating rapidly and synchronously. Unlike the massive government spending of the past two decades, there is no global financial crisis or pandemic requiring trillions of dollars in bailouts. Instead, economic growth appears robust, the private sector is experiencing an unprecedented capital spending boom driven by an artificial intelligence arms race, and stock markets are at record highs. These dynamics are clearly reinforcing each other.
Reuters columnist Jamie McGeever said that governments are spending money more freely because they are adapting to a new world reality: globalization is fracturing (or even dying), being replaced by polarization, isolationism, and increasingly tense geopolitical situations.
Countries have pledged to increase investment in defense, energy and resource security, and technological advancements, while also promising to help voters address the cost of living. These commitments could put enormous pressure on public finances that have not yet fully recovered from the pandemic.
In the United States, Trump has requested a 50% increase in the defense budget to $1.5 trillion, which would...Significantly expand the budget deficit, which is already approaching 6% of GDP.At the same time, Germany lifted its "debt brake" mechanism, and new borrowing for defense and other spending this year will approach 200 billion euros.
The situation is similar in Japan. Sanae Takaichi's Liberal Democratic Party won a landslide victory in Sunday's election, and she pledged to boost the Japanese economy through massive spending increases and tax cuts, as well as strengthen military and energy security. To this end, Japan will launch a massive supplementary budget of up to $117 billion, primarily funded through the issuance of new debt.
As debt levels, deficit levels, and yield curves rise across the country, the market may experience "indigestion," and anxiety may increase accordingly.Bond investors will demand higher yields to absorb such a large volume of bond issuance.
McGeever stated thatThe central bank is no longer a reliable "bagholder".Kevin Warsh, Trump's chosen successor to Jerome Powell as Federal Reserve Chairman, has stated that the Fed should shrink its balance sheet. The Bank of England and the European Central Bank are also reducing their respective asset sizes. Even the Bank of Japan has been reducing its bond purchases since 2024, and may have no intention of bailing out the Takashi Sanae government if yields soar.
Governments are attempting to ease pressure by issuing more short-term treasury bills and shortening debt maturities. While this helps limit borrowing costs and reduce investors’ “duration” risk, it increases the risk of “rollover”—the risk of periodically refinancing maturing debt.
The current hope is that additional borrowing will stimulate enough growth to stabilize the debt-to-GDP ratio and ensure debt sustainability, as fiscal discipline is unlikely to return in the near term.
In a report last week, HSBC analysts Mike Cudzil and others wrote:Unless nominal growth rebounds and leads to increased income and tax revenue—which may not be enough on its own through investment in artificial intelligence or productivity—some countries may face serious challenges to fiscal consolidation.”
The required consolidation will be enormous. According to HSBC's calculations, at current borrowing costs,The United States needs to make fiscal adjustments exceeding 4% of GDP to stabilize its debt ratio.France needs 3%, while Britain and Germany need 2%.
Such a large-scale fiscal adjustment is extremely rare.Since 1990, major developed economies have only seen GDP adjustments exceeding 4% over five years eight times, and exceeding 3% only 15 times.
Whether this massive fiscal expansion will ultimately lead to currency devaluation, hyperinflation, and a bond market collapse remains controversial. But even if these doomsday scenarios do not materialize, it is foreseeable that the bond market will continue to be under pressure in the future.
All of this suggests that in today's fragmented new world, the 40% share in the traditional "60/40" stock-bond portfolio appears increasingly vulnerable.
