“We must look at the price system as such a mechanism for communicating information if we want to understand its real function – a function which, of course, it fulfils less perfectly as prices grow more rigid.” F. A. Hayek, 1945.
The above is a quote from one of the many great pieces from Friedrich August von Hayek – “The Use of Knowledge in Society”. He, along with the likes of Adam Smith, spoke/wrote eloquently about the role prices play in dispersing information to the multitude of market participants, all making decisions in their best interests with little knowledge of all the bits and pieces undergirding the production, distribution, uses, pieces, of the items that they then engaged with in their own trade. All they had was price. When you take away the honesty of the price signal, you destroy information, and that leads to poor decision making and malinvestment.
We have had good old rants for years as relates to Japan. For decades, the great minds of the Bank of Japan (BOJ) felt that they knew better than the combined borrowers and savers, hedgers and speculators, importers and exporters, producers and consumers, all the millions upon millions of market participants, what the interest rate in Japan should be. What hubris.
Of course, this wasn’t just Japan. This eventually became the game in the entire world. Government bond markets were entirely taken over by Rational Accounting Man (RAM). The issuers of government debt were not making price-sensitive economic decisions with their own skin-in-the-game. The buyers, likewise, were not managing their own capital driven by path-through-time decisions of terminal wealth to fund retirements. The big buyers, as we have so often discussed, were: QE/QQE/YCC implementing central bankers, global FX reserve managers buying other people’s bonds as their version of QE (aka FX Reserve Management), banks following rules and incentives to own 0% RWAs and HQLA assets aligning to distorted single period incentive structures, pension funds and insurance companies reducing capital requirements through extending and leveraging duration and wealth management entities acting with hard-coded certainty that bonds were risk mitigating in a balanced portfolio construct.
These price-insensitive players came to dominate the flows of government bond markets. The price-sensitive participants, what we refer to as Boundedly Rational Agents (BRA), disappeared into irrelevance by the time of the bond bubble peaks in late 2020. Prices had no information, other than in understanding the mechanistic responses of the various RAM participants.
Now, as BRAs are increasingly depended upon to pick up the slack as the marginal buyer, due to reduced appetite from one class of RAM after the next, without any respite in terms of reduced issuance from the price-insensitive issuer, we are faced with the current circumstance of searching for a stable equilibrium price.
Figure 1: US 10yr Treasury Yield. 1990 – Sept 2026
Source: Bloomberg
Figure 2: German 10yr Bund Yield. 1990 – Sept 2026
Source: Bloomberg
Figure 3: UK 10yr Gilt Yield. 1990 – Sept 2026
Source: Bloomberg
Figure 4: Japan 10yr JGB Yields. 1990 – Sept 2026
Source: Bloomberg
We discussed it at length last month in our August 2026 Update – “The Same Old Thing” Convex Strategies | Risk Update: August 2026 – “The Same Old Thing”.
“The marginal buyers today are no longer Rational Accounting Man but rather actual folks with skin-in-the-game, what we would class as Boundedly Rational Agents, people making actual long-term investment decisions on their own capital, for their own retirement. At peak financial repression, Boundedly Rational Agents were nowhere to be found in the day-to-day activities of bond markets. Now Treasury Secretary Bessent and Fed Chairman Warsh need them to pick up the slack from the buried-in-the-mud Rational Accounting Men.” Convex Strategies.
Hanno Lustig continues to do some of the best concurrent writing on just these topics.
Global bond markets. Marked to Market. Part I.
“It is not a stretch to conjecture that these massive purchases may not have helped price discovery at the long end of the yield curve… If a meaningful part of the low rates of the 2010s reflected price-insensitive demand from central banks and foreign official investors, then the fiscal space it created was engineered. Government that calibrated their fiscal paths on the assumption that it was permanent are now waking up with a bad fiscal hangover.” Hanno Lustig, September 2026.
This is a great note and digs, much more than most commentators, into the global nature of these challenges, what we long ago dubbed as the Hunger Games of debt issuance. The below chart gives a wonderfully clear image of the problem.
Figure 5: Net Issuance less Central Bank Purchases and Average 10yr Real Yield. US, Eurozone, UK, Japan. 2010-2025
Source: Global bond markets. Marked to Market. Part I.
This chart, unfortunately, only reflects the rise and fall of the share of bond absorption by the respective central banks. Not an insignificant factor, as they were the largest buyers at bubble peaks and came to a hard stop once QE eventually got shut down. In some minor cases the central banks even became bond sellers where proactive attempts to do QT were tested, temporarily. Other RAMs, e.g. insurance companies, are also having a big impact due to their declining bond purchases.
Here is a great paper, from Matteo Leombroni, et al, looking at the declining appetite for European government duration debt from insurance companies. Another major group of RAM participants that find themselves with less need for duration bonds than they had been willing to absorb when yields were very much lower than they are today.
The below chart sums up the problem very simply.
Figure 6: Declining Appetite for European Government Duration Debt by Insurance Companies
Source: qe_insurance_structure.pdf
“… between 2015 and 2024, insurers’ share of outstanding government bonds fell from 18.6 to 11.8 percent – a decline of almost 40 percent relative to their initial share. When measured relative to all Euro area investors, the drop is even more pronounced, from 25.7 to 15.1 percent. These figures mark a structural retreat of the largest long-term investors from the sovereign bond market.” Matteo Leombroni, et al, September 2026.
As government bond markets continue to perform poorly, more and more commentary has been materializing to address the subject of “who’s gonna buy the bonds?”.
Here is a great look at the competition for bond issuance from legendary Fed dissenter, Thomas Hoenig. He highlights two behemoths in the competition; the US federal government and the infrastructure build out driven by the race to artificial intelligence.
Demand for Capital: A Crowded Field – by Thomas Hoenig
Tom highlights something very similar to the negative feedback loop that we often speak about, highlighting the continuing trajectory in the wrong direction in terms of relative exposure to the risks of fiscal dominance.
“The debt burden is compounded by the cost of servicing it. Net interest costs have roughly tripled since 2020 and now exceed $1 trillion a year… Higher interest rates raise the cost of both newly issued debt and of refinancing maturing obligations. Interest expense then becomes an additional contributor to the deficit, requiring still more borrowing… This creates a negative feedback loop. Larger deficits require more Treasury borrowing. More borrowing adds to demand for capital and can place upward pressure on rates. Higher rates increase interest expense, which contributes to larger deficits and still more debt.” Thomas Hoenig, October 2026.
Figure 7: Rising US Govt Interest Cost
Source: Demand for Capital: A Crowded Field – by Thomas Hoenig
Tom highlights that a key buyer of US Treasury securities has been foreign investors and that, for a variety of reasons, they have been reducing their relative share of purchases. Unfortunately, he doesn’t raise the obvious point that most all of those foreign buyers sit in countries that themselves are competitors in our so named “Hunger Games” of bond issuance, each of which is going through their own form of this very same struggle and negative feedback loop. The Hunger Games is not just a US phenomenon; it is a global zero-sum game.
One of the notably weak players in the competition is France. We have talked about the path towards the internal competition for capital in the Eurozone going back to our December 2022 Update – “Restoring Market Function” Convex Strategies | Risk Update: December 2022 – Restoring Market Function – where we highlighted the similar views of our friend Russell Napier. We have the good fortune at the moment of being able to catch up with Russell’s latest views in this recent interview:
The Mechanics of Financial Repression | Russell Napier – YouTube
Russell gives probably the best explanation of financial repression we have ever heard.
“When I talk about financial repression, it is kind of esoteric. So, I had to think up a better phrase for it. So, I call it stealing money from old people, slowly. You must do it slowly, cause you mustn’t frighten the horses… You denude property of its ability to protect you from inflation.” Russell Napier, September 2026.
Russell lays out our point about RAM being the tool of financial repression for the governments that decide that is their solution to these problems. Governments force regulated entities to buy bonds, with their client’s money, at yields below inflation.
This very point plays a big role in the negative feedback loop that drives the emergent result of our own demographic agent-based model. If you destroy the purchasing capacity of people’s savings, aligned with a government that has made certain explicit and implicit promises to support populations in retirement, you can see how you very easily fall into the negative feedback loop of high deficit -> financial repression -> high inflation -> debased savings of retirees -> government support to retirees -> declining taxpayer base -> high deficit.
Russell zeroes in on what many would consider the weakest link in the Hunger Games, France. Anybody paying attention of late will be aware that Russell has been reasonable in beating this drum.
Figure 8: France 30yr OAT Yield. 1990 – Sept 2026
Source: Bloomberg
France checks all the wrong boxes. Bad demographics. Already very high taxes relative to GDP. Sizeable current account and trade deficits. A fiscal deficit of 5.4% of GDP and Debt/GDP around 119%. Lastly, a government, for now, with no realistic path to solving these problems. If you doubt our claims, we suggest you read about France’s recent 2027 budget announcement.
French PM presents belt-tightening 2027 budget, including frozen wages and new taxes – France 24
For those assuming that the ECB is about to swoop in and save French bonds with their Transmission Protection Instrument (TPI), you need to consider the problematic fact that said TPI comes with rules that makes countries ineligible for support if they are subject to an “excessive deficit procedure” (EDP) and/or are subject to an “excessive imbalance procedure” (EIP). Without spiralling into the acronym stew, leave it to say that France is not, strictly, eligible.
Keep an eye open for ECB President Lagarde, a former French Finance Minister with a flexible attitude towards rules, coming up with ways to “dynamically adjust” (an official term) the said rules to justify on some systemic basis the ECB purchases of French bonds.
US Treasury Secretary Bessent famously claimed that he is, first and foremost, a bond salesman. We would argue that the same is true for every Treasury Secretary/Finance Minister/Chancellor and, as well, for every central banker. How do you get the most popular guy/gal at the ball, the Boundedly Rational Agent, to buy your bonds? How do you convince a boundedly rational market participant that your bonds are a good savings vehicle for his future spending needs? Short of doing that, you are back in the business that, in no small part, has gotten us to where we are now, and that Russell discusses so brilliantly in the above linked interview, that of financial repression via ordering/forcing/incentivizing Rational Accounting Man to buy the bonds.
Can you convince BRAs that the fiscal and monetary authorities are committed to sustaining the purchasing power of the fiat ducats saved in their bonds? Can you even convince them that your randomly chosen measure of price stability (e.g. PCE Core in the US, Harmonized CPI in the Eurozone, CPI ex-Fresh Food in Japan), most certainly a poster child for Goodhart’s Law, is even remotely representative of the things that they want to prioritize their savings to purchase in the future? Things like homes, educations, health care, that have risen in cost at a far faster pace than the so-called official measures of inflation. Can you convince them that the debasement that has taken place, the destruction of compounded wealth (again, please listen to Russell) that has occurred ever since the instigation of extraordinary measures like QE enabled the explosion of government debt?
The airwaves are full of thoughtful advocates openly discussing the preferred solution of financial repression, of ongoing theft (slowly, so the horses don’t bolt). If BRAs watch/listen/read financial commentary, it is about the only thing they ever see/hear/read on the subject.
There are plenty of arguments as to whether the central banks can contain inflation, return towards their price stability mandated levels, by hiking rates. We doubt central bankers, or Sharpe World economists in general, know much about the complex, adaptive, reflexive, second and third order effects of any of their chosen actions. We do, however, suspect that there is an element, given they have forever told us that is how they fight inflation, that they would like to give some hint of making an effort to shore up some belief from the marginal buyer.
As such, we did see a string of policy rate increases at the September run of policy meetings.
The Federal Reserve hiked 25bp, following the path that the market had already put in place by raising the yield on the 2yr Treasury bond.
Transcript of Chairman Warsh’s Press Conference, September 16, 2026
Figure 9: US Fed Funds Rate (white) and 2yr Tsy Bond Yield (blue). 1991 – Sept 2026. June 1999 (white vertical)
Source: Bloomberg, Convex Strategies
The ECB hiked 25bps, following a higher 2yr Bund yield.
Figure 10: ECB Deposit Rate (white) and 2yr Bund Yield (blue). 1998 – Sept 2026. Nov 1999 (white vertical)
Source: Bloomberg, Convex Strategies
Bank of Japan hiked 25bps, following a higher 2yr JGB yield.
Figure 11: Japan BOJ Policy Rate (white) and 2yr JGB Yield (blue). 2000 – September 2026
Source: Bloomberg, Convex Strategies
The Reserve Bank of Australia hiked 25bps, following a higher 2yr government bond yield.
Media Conference: Monetary Policy Decision – 29 September 2026 | Speeches | RBA
Figure 12: Australia RBA Policy Rate (white) and 2yr Aus Govt Bond Yield (blue). 2000 – September 2026
Source: Bloomberg, Convex Strategies
The Bank of England did not hike, ignoring the higher 2yr Gilt yields.
Figure 13: UK BOE Bank Rate (white) and 2yr Gilt Yield (blue). 1993- Sept 2026. Nov 1999 (white vertical)
Source: Bloomberg, Convex Strategies
If you are a BRA that is looking for confidence in the sincerity of Bank of England’s commitment to restoring/maintaining price stability, per their very specific mandate, you will not find any of it in the customary exchange of letters, required whenever BOE fails to achieve said mandate in this case keeping it below 3%, between the BOE Governor and the Chancellor of the Exchequer.
governor-cpi-inflation-letter-september.pdf
260917-chancellor-open-letter-to-the-governor.pdf
“Bank staff’s latest assessment is that inflation will rise to around 3.75% in 2026 Q4 and slightly above 4% in early 2027… The MPC has statutory objectives to maintain price stability… The MPC sets monetary policy to meet the 2% inflation target… At the meeting ending on 16 September 2026, the Monetary Policy Committee (MPC) judged that it is appropriate to maintain Bank Rate at 3.75% at this meeting. The Committee stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”
BRAs will interpret that from the perspective of the accumulated impairment, and thus consideration towards ongoing impairment, of the cost level. BRAs cannot take Bank of England seriously.
Figure 14: UK CPI Index (white). 1997 – Aug 2026. Circa 2% per annum trend 1997 – 2020 (red). Circa 5% per annum trend 2020 – Aug 2026 (green)
Source: Bloomberg, Convex Strategies
Likewise, after a somewhat confidence restoring official statement from RBA Governor Michelle Bullock, she cracked under the pressure of the unrelenting questioning at the subsequent press conference and quickly found her preferred spot to circumvent accountability.
“The Iran war has been a big shock and has made us all poorer” Michelle Bullock, September 2026.
From the BRAs perspective, they would interpret that this way.
Figure 15: Australia CPI Index 1980 – June 2026 (white). RBA Adopt 2-3% Target March 1993 (green). Iran War March 2026 (red)
Source: Bloomberg, Convex Strategies
We would remind Governor Bullock, and all her like-minded central banker-ilk, of this uniquely relevant quote that we first highlighted in our January 2026 Update – “Simon’s Scissors” Convex Strategies | Risk Update: January 2026 – “Simon’s Scissors”
“History is a study of decision, not of events…” Dan Davies, August 2025.
The one thing that they all had in common, hikers and non-hikers alike, their 2yr government bond yields all continued to go higher after the meetings. None nearly as much, though, as our above-mentioned weakest link – France.
Figure 16: ECB Deposit Rate (white) and 2yr OAT Yield (blue). 1998 – Sept 2026
Source: Bloomberg, Convex Strategies
The French 2yr OAT yield is circa 175bps above the ECB Deposit Rate. The German Bund 2yr yield is only 50-70bps over the ECB Deposit Rate. Which one is the ECB managing toward? Which one’s inflation is the ECB targeting? Whose r* is the right r*? (That one is just rhetorical, please don’t think that we assign any realistic value to the concept of r*). Are they managing towards one at the neglect of the other? Or are they managing towards the average at the neglect of both?
We could rant endlessly on this subject. There are fully 14 more links to papers and notes, that we saved over the month of September related to this topic, for potential inclusion in this Update. But we will just wrap it up with one last spin through the implications of our Hunger Games and Resource Wars analogy. Debt issuance is now a competition as supply of debt continues to grow, in the face of dwindling demand from the most dominant buyers, aka Rational Accounting Man, up to the peak of the bond market bubble – think capital controls. If everybody is your competitor for debt issuance, then everybody is your competitor for trade (think of China, as opposed to tapping foreign savers by selling bonds, as tapping savers selling cheap EVs) – think tariffs and trade wars. Everybody becomes your competitor for key minerals and resources, critical to building out your tech stack to achieve the hoped-for productivity gains to overcome the ever-fewer taxpayers dynamic – think onshoring and export controls and blockade of sea lanes. And, inevitably, everybody is your competitor in defense, so you need to issue your bonds, while you still can, and start jacking up your military spending. Sadly, a far too common theme at the moment.
The likes of Japan and Germany were long the biggest providers of capital into the Hunger Games, into the competition to issue debt. They are now, one by one, becoming competitors. As long as the world needs Boundedly Rational Agents to be the marginal buyer, it is hard not to imagine continuing struggles to stabilize bond markets. Maybe fresh rule changes can reactivate financial repression at the hands of Rational Accounting Man. Maybe rates will rise to a level that the competition for capital won’t just be between other debt issuers but will start to be between other asset classes as well. As we have said at junctures like this at past extreme strains on bond markets – “for bond markets, a recession would be the good outcome”.
Read our Disclaimer by clicking here