Since the pandemic, the influence of global markets on the UK has intensified. Approximately half of the movements in the UK's government bond (gilt) yield curve are now driven by external factors, primarily from the U.S. and Eurozone, up from one-third pre-pandemic.

Contrary to central bank theories, falling term premia do not reflect low inflation expectations. Instead, they signal investors' rising demand for safe-haven government bonds as liquidity tightens and systemic risks grow. It is a risk-off signal, not a risk-on one.

A country's bond yield reflects market confidence in its ability to repay debt. The US 30-year yield crossing 5% is a stress signal. Critically, this is now a global phenomenon across G7 nations, indicating widespread lack of faith in the world's leading economies and leaving no safe haven.

Drawing from his time at the US Treasury, Amias Gerety explains that recessions are about slowing growth. A financial crisis is a far more dangerous event where fundamental assumptions collapse because assets previously considered safe are suddenly perceived as worthless, causing a "sudden stop" in the economy.

During a sharp market shock, assets that are normally used for diversification (stocks, bonds, gold) can all move in the same negative direction. This failure of traditional hedging forces poorly positioned investors to sell assets indiscriminately to reduce overall exposure, which in turn amplifies the downturn.

As the first major economy to reach its debt limit, Japan's bond market is seizing up, forcing capital into riskier assets like equities. This dynamic of a bursting sovereign bond bubble inadvertently fueling the real economy is a likely preview of the path the United States will eventually follow.

The failure of Silicon Valley Bank was not an isolated event but a predictable outcome of a global issue. Many entities, including pension funds and insurance companies, are "leveraged long" on government bonds whose values plummeted as interest rates rose.

The dominance of leveraged hedge funds as the marginal buyers of long-term bonds means that during a crisis, bonds are sold off alongside equities. This forced de-leveraging negates their traditional safe-haven role, transforming them into a risk asset that falls during market stress.

For 40 years, falling rates pushed 'safe' bond funds into increasingly risky assets to chase yield. With rates now rising, these mis-categorized portfolios are the most vulnerable part of the financial system. A crisis in credit or sovereign debt is more probable than a stock-market-led crash.