Politicians will continue running large deficits as long as the bond market tolerates it by keeping interest rates low. The ultimate correcting mechanism for government spending isn't political discipline, but the bond market's impersonal decision to raise rates, forcing fiscal responsibility.

Despite rising sovereign bond yields, corporate credit spreads remain tight as fiscal stimulus buoys corporations. This shifts credit risk from the private sector to governments themselves, creating a dangerous divergence where high-yield debt outperforms sovereign bonds, keeping the equity market propped up for now.

Historically, surges in U.S. public debt have consistently led to periods of negative real interest rates. This suggests that the sheer weight of government debt creates a structural constraint, forcing markets to keep real rates capped, irrespective of short-term inflation or central bank policy.

Global governments are actively pursuing policies (running economies hot, suppressing energy costs, managing rates down) to create a period of artificial prosperity. This is a deliberate strategy to push a massive debt sustainability crisis further into the future, which will feel great until it doesn't.

Deteriorating debt fundamentals are a known long-term risk, but markets often remain complacent until a specific political event, like an election or leadership change, acts as a trigger. These upheavals force an immediate re-evaluation of what is sustainable, transforming abstract fiscal worries into concrete, costly market volatility.

Recent increases in emerging market rates are accompanied by flattening or stable long-end yield curves. This suggests markets are pricing in central bank rate hikes to control inflation, rather than reacting to worsening fiscal concerns, which would typically cause the curve to steepen.

Despite fears of fiscal dominance driving yields up, US bond yields have remained controlled. This suggests a "financial repression" scenario is winning, where the Treasury and Federal Reserve coordinate, perhaps through careful auction management, to keep borrowing costs contained and suppress long-term rates.

Faced with high debt loads, developed markets like the UK are adopting policies typical of emerging markets. This "financial repression" involves treasury and central bank coordination to manage debt issuance—favoring short-term debt over long-term—to artificially suppress yields on 10- and 30-year bonds and avoid a sovereign debt crisis.

The central strategy in macroeconomics is to stifle volatility in foundational markets like bonds and foreign exchange. This engineered stability allows nominal GDP to outpace debt, effectively devaluing it over time. This delicate balance is most vulnerable to unpredictable geopolitical shocks that can shatter the low-volatility regime.