Long Bonds, Short Fuse
The U.S. debt crisis just crossed a dangerous threshold
Markets move on stories.
Not what’s true.
Not what you believe.
Not even what everyone believes.
Stories. And stories move when everyone believes everyone else believes them.
It’s the common knowledge threshold.
Let’s recap:
What’s true: The U.S. has a $1.8 trillion deficit, $39 trillion in debt.
What you believe: Let me know in the comments.
What everyone believes: Markets have known the debt is unfixable for years.
Nothing surprising.
So what’s different in 2026?
Ben Hunt of Epsilon Theory points to two moments:
The Big Beautiful Bill signaled fiscal prudence is politically dead.
Elon Musk’s DOGE exit signaled even the theatrical attempt to cut spending is over.
These aren’t subtle signals. They’re front page admissions.
Politicians gave up years ago. Now they’ve even stopped pretending.
According to Hunt, that changes everything.
Here’s Hunt’s logic:
Once enough people conclude something is unfixable, it becomes consensus.
Once it’s consensus, everyone assumes everyone else believes it too.
Once everyone assumes that, the game changes.
The new shared story reprices the market.
If it does, two things get hit first.
Long-term bonds. And tech valuations.
Rising rates kill long-term bonds directly. Anything priced on future earnings (most of tech) gets crushed when the discount rate climbs.
So what do you watch?
One number. The term premium.
The extra yield investors demand for lending long versus short:
Rising term premium → this may be real.
Falling term premium → false alarm.
That’s your signal. Here’s what it’s been saying lately:
My view: All assumptions need revisiting all the time. That goes for the prevailing conventional wisdom about long-dated bonds and equity valuations. Interest rates and discount rates have been artificially low for decades so mean reversion is overdue. Beyond revisiting long-term bond weights and tech multiples, which if even needed are just standard adjustments, it’s hard to justify factoring an acute crisis scenario into decisions.
What do you think?