In a recent article published in the Financial Times, financial expert Matt King pointed out that high government borrowing has historically led to lower bond yields in advanced economies. This trend dates back to the 1880s, and it remains true today for countries like the US, Germany, Italy, Japan, the UK, Switzerland, and Australia.
King’s insights run counter to the prevailing belief that increasing government debt will drive bond yields up. Heavy hitters in the market, including Ray Dalio and Bill Gross, have warned of the potential for a “doom loop” scenario, which could eventually lead to some form of default within two decades.
However, King offered three reasons why bond yields have fallen during borrowing binges and why the current surge will likely follow a similar pattern. Firstly, government intervention, such as expansion in central bank balance sheets and capital controls, has been used to hold down yields. Secondly, economic strength and expectations of future interest rates, not deficits, are the primary drivers of bond yields. Finally, the borrowing process itself is more self-funded than realized, as issuing a bond does not draw down private-sector liquidity on a net basis.
Treasury Secretary Janet Yellen recently echoed this sentiment, attributing the rise in yields to confidence in the US economy and expectations of a higher-for-longer monetary environment.
King cautioned that while borrowing binges can influence asset prices, they do not justify unlimited deficit spending. He pointed to last year’s spike in UK bond yields after a proposed budget called for tax cuts and increased borrowing. Ultimately, fiscal crises in bond markets are more likely to be driven by sudden collapses in credibility, currency runs, and imported inflation rather than the inevitability of compounding interest payments.
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