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Bond market investors are giving more attention to concerns about the trajectory of government debt globally. Recent episodes of market volatility in the UK and France in response to government budget announcements and political instability provide valuable insights for what may lay ahead in other jurisdictions, including the US.
While advanced economies have generally experienced rising government debt and more entrenched budget deficits post the pandemic, Central Banks have been buying fewer bonds as they pivot from quantitative easing to quantitative tightening. This has led investors to ask - are current fiscal settings sustainable and what is the right risk premium to pay for government debt?
Our Liquid Markets team have identified several key lessons which, when applied to the US, may see bond vigilantes stir upon seeing further material and unfunded expansionary policy announcements, combined with a significant weakening of guardrails and institutions. In particular, we believe that any credible threat to the Federal Reserve's independence and/or overreach of executive authority, could be a potential trigger for a reassessment of bond risk premium in the Treasury Market.
Read more in this latest QIC Insights paper.