How 'Bondmageddon' may reset financial markets
Rising interest rates typically end stock-market booms, as they did in 1987, 1994, 2000 and 2008.
U.S. 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y Treasury bond rates are up 0.60% and 0.40%, respectively, since the start of the year. Japanese, U.K., German and French 10-year rates are up 0.90%, 0.70%, 0.50% and 0.70% over the same period. The fact that these modest rises, in historical terms, are causing angst about "Bondmageddon" points to deep-seated problems in markets.
The primary cause is higher energy prices, driven by the Middle East conflict. Headline prices of oil, around $90 per barrel for Brent crude, are misleading, because due to higher refining costs, diesel prices are around $170-190 per barrel equivalent, and the full flow-through of energy prices into fertilizers, industrial chemicals, plastics and polyester and eventually into consumer prices will not be seen until 2027. There is additional pressure from disruption to food supplies and shipping from wars and climate.
Even if the kinetic conflicts end, the continuing parallel economic wars will keep prices high. Since 2016, the U.S. has implemented tariffs, export or import bans, sanctions and asset seizures that have interrupted cross-border investment and trade of goods and services. The higher costs such as tariffs are borne by consumers. Disruptions to supply chains, such as for raw materials like rare earths, and to transport routes will continue to add to cost pressures.
Economic warfare exacerbates the trend toward deglobalization or "slow-balization," with countries re-siting production onshore for reasons of sovereignty, independence and domestic employment. This increases costs, as the reshored goods are usually more expensive than international equivalents, which will drive further inflation.
Another driver of higher rates is increased issuance of government debt to finance government spending. The U.S. has persistent budget deficits (6% of gross domestic product currently). The average fiscal deficit across Organization for Economic Cooperation and Development member countries is 4.6% of GDP. The rising debt reflects large serial crises, increased defense spending, demographic pressures and addiction to expansionary fiscal settings, low interest rates and loose monetary policy to sustain growth. Europe also faces a new debt crisis: The focus is now on FIB (France, Italy and Britain), all heavily indebted countries with stagnant economies, structural problems and growing political strains.
Changing capital flows affect interest rates. Unlike Japan, which is domestically financed (90% of its government bonds are held by local investors), many deeply indebted countries live on the kindness of strangers. The U.S. is reliant on foreign capital, with overseas investors holding roughly 30% of government debt as well as significant amounts of corporate securities.
Economic losses sustained by Persian Gulf petrostates mean that they have fewer available funds and may even need to sell existing holdings. Traditional investors, like central banks and sovereign wealth funds, have reduced holdings of government debt, especially U.S. Treasury bonds, in part reflecting concerns about the security of their money from asset seizures. To fund the government, the U.S. is now increasingly dependent on volatile demand from leveraged speculators in the form of basis trades.
Inflation, higher borrowing and changing capital flows suggest continued pressure on interest rates globally. As government rates are the bedrock of capital costs throughout economies, the effects are far-reaching.
Facing higher interest bills, households and businesses will cut back on spending and investment. The overstretched will slide into financial distress, inflicting losses on banks and on the private lenders that have proliferated.
Governments face rising interest expenses, reducing the funds available for other spending. The U.S. government's annual interest expense on its national debt is currently around $1.2 trillion - over 3% of GDP and about 20% of tax revenues. A 0.01% (1 basis point) increase in rates adds around $4 billion in annual expense. The Japanese government's borrowing costs are a quarter of spending and projected to reach 30% of outlays in three years.
Higher rates will result in losses on existing holdings for investors, banks and central banks. The 2023 collapse of Silicon Valley Bank was the result of losses on its holdings of long-dated securities that had to be liquidated when it experienced large withdrawals by depositors. As of the end of 2025, total unrealized losses on held-to-maturity and available-for-sale securities portfolios were $306 billion, but those will have increased due to the rise in interest rates. Central banks globally have substantial holdings of government bonds and mortgage-backed securities, much of that acquired as part of quantitative-easing programs. As of early 2026, the U.S. Federal Reserve had unrealized losses on its bond holdings of around $850 billion, which will also have risen. Globally, the losses are four to five times that amount.
Overstretched asset prices will eventually have to reflect the lower current value of future cash flows when discounted at higher discount rates. More attractive returns on safer government bonds also mean greater competition for riskier alternatives, driving down values of stocks and other assets.
Some analysts have been sanguine about the risk, assuming that anticipated higher rates are already discounted by asset prices. They argue that artificial intelligence will boost productivity, which will result in lower rates.
But the danger from a large inflation shock, geopolitical fracture, aggressive central bank rate increases or difficulties in government issuance is substantial. Given that the U.S. government must refinance around a third of its debt every year, as it funds increasingly with short-dated Treasury bills to minimize borrowing costs, the risk of a disruption is not trivial. Such an event would trigger a major credit or currency crisis.
In that case, those believing in lower rates would be correct, but for a difficult reason - a major financial crash followed by recession or depression.
Satyajit Das is a former banker and author of Traders, Guns & Money, Extreme Money, and The Age of Stagnation ( 2021). His new book The Everything Bubble will be released in 2027.
-Satyajit Das
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