Governments rarely correct deteriorating public finances until they meet some form of debt market disturbance, but the retreat of central banks from sovereign bond markets may eventually set the scene for a showdown.
Longstanding market angst about the dramatic buildup of Western government debt since the pandemic – some might say since the global financial crisis 16 years ago – has not yet been matched by anything approaching an investor strike or warning shot.
Even though bond prices were predictably hammered by the global inflation spike and interest rate rises over the past three years, they have so far re-priced in a relatively orderly manner in keeping with the new official rate parameters.
Aside from the brief British gilt shock after 2022′s quickly-reversed UK budget blowout, there’s been little sign of market stress in U.S. or euro zone debt, and risk premiums for holding longer duration debt remains historically subdued.
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