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The World's Safest Market Is Breaking

September 1, 2026 16:500 comments♥ 0
00:00 The bond market has been the biggest story in finance for the past 2 weeks. Everybody's talking about America's national debt crossing $40 trillion and the Treasury doubling its bond buyback program. But those two stories have something in common. They're both American stories. And what happened in
00:15 the bond market last week wasn't. In the same few days, we saw America's 30-year rate hit its highest level since 2007, Germany's since 2011, the United Kingdom's since 1998, France's since 2008, Canada's since 2010, while Japan's hit an all-time high. That's six different countries, all feeling the
00:35 same pain in the same week. So, what's being reported and what's actually happening doesn't quite line up. At some point, the coincidence stops being a coincidence. The obvious answer everyone reaches for is debt. Governments borrowed too much, lenders got nervous, and now lenders want more to keep
00:50 lending. But that explanation only gets you so far. Germany is the fiscal conservative of the group. They carry the lightest debt load among the G7 economies by a pretty wide margin. But Germany's long rates still hit a 15-year high anyway, which means there's clearly more to the story. It's not something
01:07 happening to just one economy. It's happening to everyone. And it starts somewhere nobody was looking with one very particular buyer. one that sat underneath every major bond market in the world. In order to find out exactly who that is, we have to go back to the 80s. Let's pretend you own Mund Difflin,
01:23 the biggest paper mill in town. You've got a star employee. His name's Dwight. 20 years on the job, never missed a shift, and a beet farmer on the weekend. Solid guy. The deal at your mill is the standard for this time period. Work here long enough, and when you retire, the company pays you $2,000 a month, every
01:41 month, for the rest of your life. It's called a pension. For Dwight, it's a great deal. He never has to think about running out of money again. For you, the owner of the paper mill, it's a new bill and not a bill you pay once. A bill that starts the day Dwight retires and doesn't stop until the day he dies.
01:57 Might be 15 years, might be 35. Nobody knows. That's the part that makes this hard. If you knew Dwight needed exactly 20 years of checks, you could set aside exactly 20 years of money and be done with it. But you don't know how long the beats are going to keep him going. So, your pension problem has a very specific
02:14 shape. You owe a fixed amount on a fixed schedule, stretching decades out, which means whatever you buy to cover it needs that same shape. That rules out almost everything. You can't put Dwight's retirement in stocks. Stocks build wealth over time. Dwight needs $2,000 in cash on the first of the month,
02:32 guaranteed. And you can't take much risk with it because it isn't your money. You already promised it. If the market has a bad year, Dwight's check size doesn't get any smaller. So, you end up buying the most boring instrument in existence, something that pays a set amount on a set date and has no option to stop
02:48 paying, a 30-year government bond. You line its payments up against Dwight's payments, and the two schedules cancel each other out. You couldn't care less about what the bond you bought is worth tomorrow. You didn't buy that bond as an investment. You bought it to cover Dwight's pension. So, while everyone
03:03 argues about term premiums, whether it's a good time to be buying, and whether the Fed chair sounded slightly more worried than he did last month, you're not even listening to these conversations because the price only matters to somebody who wants to sell and you aren't selling. That bond could
03:17 get cut in half and nothing about your situation changes. The coupons will still show up on time and the principal will still come back at maturity, which makes you a very unique buyer. That's the defined benefit pension fund. They were patient, had deep pockets, were legally required to show up, and
03:33 completely unbothered by price. For 50 years, traditional pension funds were the best customers of the long end of the bond market. But they're the last of a dying breed, and I'll show you how the secret force that held up the bond market for 50 years has now disappeared. But first, a quick pause for today's
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04:55 back to what happened to that secret force holding up the bond market. In 1985, the Bureau of Labor Statistics found that 80% of full-time workers at medium and large American companies were in a defined benefit plan or a pension. By 2000, that number was 36. Today, that number sits around 14%. They weren't
05:15 wiped out by a crash. They just weren't offered anymore. They got replaced with the 401k, one human resources memo at a time, which may just sound like a small paperwork change, but it isn't. Under a pension, the company owes a fixed amount on a fixed schedule. So, it has to go buy something to match that shape. But
05:32 under a 401k, the company owes nothing past payday. The money lands in an account with Dwight's name on it, and he gets to decide where the money goes. and Dwight doesn't want to buy 30-year government bonds. According to the numbers from EBRI and the Investment Company Institute, more than 70% of all
05:48 401k assets sit in stocks, while standalone bond funds get about 5%. Which means the biggest change in structural demand in the bond market in 50 years was caused by someone in HR named Susan. The Organization for Economic Cooperation and Development is an international organization of 38
06:05 developed countries. You can think of it as the Avengers, but for economics. Across its member countries, pension funds domestic bond holdings have been cut in half from 8% in 2007 down to 4% last year. America's own central bank said the same thing. The desk that runs the Federal Reserve's bond portfolio
06:23 told the committee that ownership of Treasury securities had shifted from relatively price insensitive official sector holders to more price sensitive private investors and that this could have implications for the term premium. Translated out of central bank speak, the buyers who didn't ask the price are
06:38 being replaced by buyers who do, and the term premium is just the new buyer's extra charge on top for tying their money up for 30 years instead of 30 days. The United Kingdom's Office for Budget Responsibility also found a similar thing happening to their government bonds, known as guilts.
06:55 Today, British defined benefit pension funds hold guilts worth about 27% of the entire British economy. They estimate that falls to under 6% over the long term and shifts this size cause damage. It's estimated that weaker pension demand could push the interest rate on British government debt up by around 80
07:13 basis points which would cost the British government about 22 billion pounds per year. But it's not just the United States or the bean eating veneerswearing lads across the pond. The Netherlands, home to the largest pension system in the entire European Union, just finished rolling out the first wave
07:29 of a historic overhaul across nearly€2 trillion in assets under management. The first wave was completed on January 1st this year. It included 30 Dutch pension funds and 10 million members. All were moved from the old collective defined benefit model to an individual defined contribution model. Under the old rules,
07:47 those Dutch pension funds had to match every promise with an asset like the Dwight example. So, they bought ultra-long German bonds, French bonds, and longdated swaps. And they bought them regardless of the yield. They bought them because a regulator told them they had to, which is how Dutch
08:02 pension funds came to own an estimated 10% of the entire German sovereign bond market. But under the new rules, they don't have to be a buyer anymore. The Dutch Central Bank estimates these funds could unwind 100 to€150 billion in longdated bonds and swaps. And the biggest wave hasn't even hit yet. One
08:20 fund, ABP, the largest, holds about a third of the entire Dutch pension system on its own, more than 500 billion euros. It converts next January with almost€1 trillion of Dutch pension assets scheduled to transition next year. This matters because on the exact same move in interest rates, a 50-year bond swings
08:39 much harder than a 5-year bond. That price sensitivity is called duration. So, somebody has to be willing to hold Europe's long-term debt and absorb those swings. That job was being done in enormous size by those pension funds who were forced buyers. PIMIMCO measured the impact of this and their base case
08:56 estimate is the equivalent of 115 billion euros of 30-year bond demand simply vanishing from the long end. Every year, Europe's governments issue new debt and pay off old debt. The gap between the two is the new money they actually have to find buyers for, and it carries a certain amount of that swing
09:13 risk. The Dutch withdrawal is about half of it. one country's pension funds, half of what all of Europe needs someone to absorb every year. So, this is a global trend we're seeing that ripples through every major economy. It's not that investors refuse to lend governments money anymore. We're still seeing
09:30 auctions clear. It's that the buyers governments once knew and loved got replaced by buyers who care about the price they pay, and they want a better price. Which leaves every debt office in the world staring at the same question. If the buyers who had to show up at debt auctions are gone, what do you bring to
09:44 the auction? which leaves debt offices with a brutal choice. Keep selling 30-year bonds at punishing rates or start looking somewhere else. And they started looking somewhere else. Britain went first. A decade ago, long conventional guilts were nearly 30% of the issuance program. This year's plan
10:01 has them under 10%. The debt office even said it on the record. Market feedback noted continued declining demand for long-dated conventional guilts, in particular from the domestic pension fund sector, which is the polite way of saying we asked around and nobody wants them. Japan cut its issuance of super
10:18 long government bonds for the coming year to about 17 trillion yen, the lowest in 17 years, with the Japanese Ministry of Finance now considering reducing issuance even further in the coming months. America's making the move to the short end as well. Short-term Treasury bills now run around 22% of the
10:35 debt, above the 15 to 20% range the Treasury's own advisory committee recommends. Across the OECD, Treasury bills now out issue fixed rate bonds entirely. The ratio of 30-year plus debt sold against 1 to 5year debt is now the lowest since 2008. The OECD's phrase for all of this is that it's costefficient X
10:55 and T, which is Latin for beforehand. So, what they're saying is it's cheaper for now because shortening doesn't reduce what you owe. It just changes how often you have to ask. When government debt comes due, the government doesn't pay it off with tax revenue or a surplus. That would be too fiscally
11:11 responsible. Instead, it just borrows the money again. Same debt, new bond at today's rate. We pay the old debt by issuing new debt. So, the debt never really gets repaid. It just gets renewed. And every renewal happens at whatever the market is charging that morning. This is what's known as
11:27 rollover risk. And shortening the debt is a machine for producing more of it. Because the shorter the bond, the sooner you're back at the window asking for more debt. And here's where it comes into today. The average interest rate across everything America owes is sitting around 3 1/2%. That's low. And
11:44 it's low because most of it was borrowed back when money was cheap, but nothing being sold today costs 3 1/2%. Short-term bills are around 4% while 30-year money runs around 5.2. And roughly a third of America's tradable debt comes due over the next 12 months, more than $10 trillion. Which means
12:02 every dollar of that cheap debt gets replaced at the new price investors are charging today. So every time we roll the debt forward, the average creeps up with it one maturity at a time, and the interest bill grows. It doesn't take an auction to fail or everybody to panic sell. It just takes time. It's
12:18 inevitable. Interest on the federal debt already runs more than a trillion dollars a year. That's more than the country spends on defense or veterans benefits. And by the Congressional Budget Office's own numbers, it passes Medicare by 2028. It's the fastest growing thing the United States buys.
12:34 And it buys nothing. But like everything else we've covered, this isn't just an American problem. Every year, the OECD publishes a report on exactly this. It's 200 pages of reading that's so data heavy it makes you question all the life choices that brought you to reading it on a Saturday morning. In the report,
12:51 there are some big takeaways. Nearly 80% of everything its member governments borrow this year doesn't pay for anything. It goes to refinancing the debt they already have, not paying for roads or schools, just moving the old pile of debt forward. Last year, the borrowing cost to refinance existing
13:07 debt was about $13.5 trillion. This year, it's expected to grow to closer to 14.5, and it doesn't arrive evenly. A third of all the fixed rate debt those governments owe comes due by 2027, which matters because of when it was borrowed. Similar to the United States situation we just covered, 60% of the fixed rate
13:26 debt in the OECD that matures by 2027 was issued in 2021 or earlier, back when money was nearly free. Since 2023, the rate on new government debt has run about 2 percentage points higher than the maturing debt it's replacing. So, a third of the developed world's debt is about to get swapped out. one maturity
13:45 at a time for the same debt at a much higher price. And we're already seeing it happen. 1/5if of the fixed rate bonds outstanding in 2025 have been issued at a yield of more than 4%, the highest rate since 2015. And the private sector is only adding fuel to the fire. The major tech companies issued a record
14:03 $122 billion of bonds last year to help pay for the artificial intelligence buildout. If tech firms financed just half of their AI buildout with debt, nine companies would take about 15% of all corporate bonds issued on Earth. Across the tech industry, total AI infrastructure spend is projected to
14:20 have crossed $4 trillion by 2030. Governments and companies put together are on track to borrow about $29 trillion in 2026, $4 trillion more than they borrowed just 2 years ago, with the share of longerterm issuance in that pile of debt reaching the lowest point since 2009. Which means every government
14:38 on Earth, the entire investment grade corporate market and the largest capital buildout in history are all about to walk into the same room looking for the same cheap capital. So there's only one question left to ask. Where does this leave us? If you've taken an economics 101 class, you know how this ends. The
14:57 supply of paper is exploding while demand for it thins at the long end, which results in the cost of borrowing going up for everyone at the same time. And while the long end continues to get more expensive, as the demand doesn't match the supply, everyone moves short. There's more than $8 trillion sitting in
15:13 American money market funds, an all-time record. So, this was never a story about the world running out of money. The world has plenty of money. What it ran out of is money that will sit still. We already tried the workaround. That was the whole point of shortening. Stop selling the 30-year bond nobody is
15:28 forced to buy and sell the short stuff people actually want. Except short debt doesn't go away. It comes back and it comes back more expensive than it was before. That's a third of the developed world's fixed rate debt maturing by 2027. Not a forecast, a slow renewal from cheap debt to expensive debt at
15:46 about 2 percentage points higher. Nothing has to go wrong for that to happen. The bonds just have to reach their maturity date. We've been trained to expect financial risk to arrive as a single event, like a bubble popping or a headline. Traditional media finds whatever gets the most clicks and runs
16:01 it into the ground until a new story they can sell comes along. But that's not how things actually work. Global trends that reshape the world don't happen overnight. They take years to unfold. And none of what's happening is hidden. The data is sitting right in front of our eyes. You just have to know
16:16 where to look. Nobody takes the time to connect the dots and dig deeper anymore, which is why I made this channel. These videos take a lot of hours to make, but I like to think they're worth it. So, if you found any of this useful, it would mean the world if you hit subscribe because six governments had the same
16:32 week. And it wasn't for six different reasons. Markets don't do coincidences. When the same thing happens everywhere at once, the story being reported is usually not the story that's actually happening. >> [music]