For years, analysts have warned that rising deficits would eventually provoke a bond-market backlash. Yet the revolt, seen as a feature in the 1980s and 1990s, has failed to materialize in any substantial form.
In the U.S. and the UK, long-term yields remain under control despite heavy issuance and stubborn inflation.
Stability In The West
Core inflation has held above 3% in the U.S., yet the 10-year is well below nominal GDP growth and levels typical before the 2008 crisis. Even extraordinary fiscal developments — including the $38 trillion national debt and the administration's ambitious multitrillion-dollar spending programs — have failed to spark sustained selling.
Doubts about the Federal Reserve's independence, once a potential trigger for volatility, have similarly faded in market pricing.
A similar pattern is unfolding in the UK – though with a larger political twist. Despite rising spending commitments, the gilt market has rewarded Chancellor Rachel Reeves for expanding fiscal buffers and signaling a more orthodox budget strategy. Long-dated gilt yields fell after the latest Budget, and the pound strengthened. It was a response investors framed as a vote of confidence in near-term fiscal management.
This stability is all the more striking given the structural pressures facing advanced economies. Aging populations, heightened defense spending, and the energy transition have pushed long-run borrowing needs higher. At the same time, banks have pulled back from their traditional role as dominant sovereign-bond buyers, while central banks are shrinking balance sheets rather than expanding them.
Yet, a gap in the market has to be filled. Hedge funds and leveraged non-bank investors now have a larger opportunity in those markets, yet they remain orderly for now.
Far East Under Pressure
The same can't be said for several other G-10 economies. Long-dated yields in those markets show clear signs of strain, particularly in Japan.
The pressure has intensified under the new administration. Prime Minister Sanae Takaichi announced a ¥21.3 trillion ($137 billion) stimulus package – far larger than expected.
The result was immediate. A sharp sell-off in Japanese government bonds, with 20- and 40-year yields hitting record highs, accompanied by a plunging yen and tumbling equities.
Investors worry not only about the substance of Takaichi's policies but about Japan's 264% debt-to-GDP ratio, the highest in the world. As the Bank of Japan slowly exits its ultra-loose stance, markets fear a flood of new supply with too few buyers.
While the U.S. and UK still enjoy relative calm, the bond vigilantes are active in the Far East.
Corporate Safe Haven
Meanwhile, the world's safe-haven bond map is shrinking. Germany and Japan no longer offer a reliable long-term refuge. Only Switzerland still holds that position, and its forward yields have fallen back toward zero. Investors are effectively paying for safety—not because Swiss growth looks exciting, but because Switzerland remains one of the few major economies with a genuinely low public-debt burden and credible fiscal institutions.
The inversion risk has produced a rare situation. Markets now treat some corporate bonds as safer than those of sovereign nations that host them. Companies such as Microsoft (NASDAQ:MSFT), Airbus (OTCPK: EADSY), L'Oréal (OTCPK: LRLCY), and Siemens (OTCPK: SMNEY) borrow at lower yields than the U.S., France, or Germany.
"It's the erosion of the perception of the rule of law which keeps investors at bay… People prefer corporate balance sheets, which are in better shape than some sovereigns," Pilar Gomez-Bravo, Co-CIO at MFS Investment Management, said per Bloomberg.
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