A Bubble with the State as the Protagonist: Why the Government Bond Market, Supposed to be a Safe Asset, Becomes a "Time Bomb"

A Bubble with the State as the Protagonist: Why the Government Bond Market, Supposed to be a Safe Asset, Becomes a "Time Bomb"


"Where will the next financial crisis come from?" When people think of this question, they often recall the reckless behavior of private finance (banks, mortgages, shadow banks) like in 2008. However, the German newspaper Handelsblatt's column "Beyond the obvious" warns that the epicenter of the crisis is shifting to **"national debt (government bonds)."** The strong expression that a slight change in conditions could make 2008 look like a "children's birthday party" indicates the difference in the scale of the problem.


1) A "Sea of Debt" of $346 Trillion—Government Debt is Increasing

The column first presents the fact that "the world is drowning in debt." According to estimates by the IIF (Institute of International Finance), global total debt increased by about $26.4 trillion from January to September 2025, reaching approximately $345.7 trillion (about 310% of GDP) by the end of September.


Moreover, the important question is, "Who is borrowing?" The increase in total debt is said to be mainly due to government borrowing rather than private borrowing, and the column emphasizes that "it is not the private sector but the state that is driving it up."


According to the IMF's outlook, government debt in advanced economies is expected to reach around 120% of GDP by 2030, and without substantial fiscal consolidation, it could swell to around 170% by 2050.


What tends to be overlooked here is not the sheer size of the numbers. The problem is that government bonds are widely used within the financial system as "safe assets," "collateral," and "regulatory preferred assets." In other words, if government bonds waver, the impact can spread through "collateral" not only to banks but also to pensions, insurance, investment funds, and commodity markets. The speed of crisis propagation could be faster than in the case of a private bubble collapse.


2) New Fragility in "Safe Assets"—Non-Banks and Leverage

The BIS (Bank for International Settlements) head has issued warnings in the same direction as the column. In a speech in November 2025, Pablo Hernández de Cos, General Manager of the BIS, stated that while government debt in advanced economies is piling up to post-war high levels, the increasing presence of non-bank financial institutions (NBFIs) in the government bond market is creating new challenges for financial stability.


Particularly problematic is the highly leveraged trading by hedge funds and others. According to Reuters, "relative value trading" (e.g., basis trading targeting slight price differences between cash and futures) is expanding in U.S. Treasuries, and there are many cases where funds are supplied under conditions close to **zero haircut (no discount on collateral value)** in repo transactions. There is a weak check on leverage.


The danger of this structure is that it "seems to work well" when the market is calm. A slight movement in government bonds results in small gains or losses. That's why leverage builds up, and when a sudden interest rate spike or liquidity shock occurs, a negative chain reaction of margin calls (additional collateral) → asset sales → price drops → further margin calls can occur.


3) Central Banks Are No Longer "Omnipotent Firefighters"

Since 2008, markets have learned that "in the end, central banks will help" during crises. But now, central banks have less freedom than they did back then.

  • In situations where inflation is prone to rekindle, the side effects of monetary easing are significant

  • The larger the government debt, the more fiscal health is damaged by increased interest payments, and pressure mounts on central banks to "support government bonds" (so-called fiscal dominance)

  • As a result, if the independence of central banks is questioned, the very credibility of government bonds is shaken


The IIF points out that over $16 trillion in refinancing is pending on the side of advanced economies by 2026, while fiscal stimulus is planned in various countries, potentially increasing debt burdens and interest payments. Even a slight tightening of interest rate conditions can create "checkmate conditions" for national finances.

4) What Could Trigger the Crisis: Small Parameter Changes Could Be Fatal

The fear of a government bond crisis is that the trigger may appear "small" on its own. For example,

  • a downturn in growth rates (reduced tax revenue)

  • delays in fiscal adjustments due to political conflicts

  • sticky prices and wages, eliminating room for rate cuts

  • a sudden change in foreign investor demand, leading to unsuccessful auctions


These are just news items on their own. However, in a world where "debt balance × refinancing frequency × interest rates" has become enormous, even a small change can sharply increase interest payments and quickly erode "fiscal space." When the market judges that "neither the central bank nor the fiscal authorities can move," the fire ignites.

5) Reactions on Social Media: Divided Views on "National Debt"

This topic is particularly divisive on social media because it involves the clash between intuition and macroeconomics on whether "national debt is the same as household debt."


(A) "Debt = Bad" Camp: Distrust in Politics and Anger at "Usage"
In financial communities on Reddit, voices are prominent that say, "Debt is fine if it goes to investment, but it ends up being 'handouts.'" In one post, an analogy is shared that additional borrowing is meaningless if it only increases "spending for elections."
At the root of this group's emotions is a strong distrust that "politics will just defer future bills." Therefore, discussions about a government bond crisis quickly connect to debates about "the quality of governance" rather than "interest rates."


(B) "The State is Different from Households" Camp: The Idea that Savings and Debt are Mirrors
On the other hand, within the same thread, the explanation that "if the private sector has a savings surplus, someone must incur debt for the economy to function" is repeated. As long as cash and deposits are "assets," there is a "someone's debt" on the other side.
Furthermore, comments leaning towards "MMT-like narratives (e.g., governments with currency issuance rights do not go bankrupt)" are also seen, and the discussion tends to become a back-and-forth between "theory" vs. "real-world politics and inflation."


(C) "This Article Hits Home" Camp: Amplifying the "Alarm" through Sharing

On LinkedIn, posts can be found sharing the article link with the note "Source: Handelsblatt." On social media, such "sharing" quietly spreads the sentiment that "government bond risks cannot be overlooked."

6) How Should We Prepare: Both Policy and Market Perspectives

From a policy perspective, the direction indicated by the BIS General Manager is suggestive. There is a need for tools that span fiscal, monetary, and supervisory (prudential) measures, and discussions are emerging about curbing leverage entering the government bond market through expanding central clearing and introducing minimum haircuts.

 
At the same time, on the fiscal side, the main focus should be on "not postponing painful adjustments." As the column's long-term debt outlook suggests, neglect increases the risk of "bills arriving in the form of interest rates."

From the perspective of investors, companies, and households, rather than recommending specific stocks, generally speaking,

  • avoiding excessive leverage (especially in situations with collateral chains)

  • ensuring liquidity (not being able to sell when you want is the worst)

  • checking resilience to rising interest rates (duration and cash flow)
    are important preparations tailored to the "shape of the crisis."


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