It’s been a catastrophic year for bond investors. Yields have spiked to levels not seen in 20-30 years – an entire generation of investors who grew up with the Great Financial Crisis, zero (or even negative) interest rates and QE are seeing 10 year government bonds paying more than 5% for the first time in their lives.

Public debt has been a problem for years, but bond investors have generally closed their eyes and lent to governments anyway. But this year, long-standing concerns about inflation and deficits collided with the worst oil shock since the 1970s and AI companies issuing billions of dollars’-worth of bonds, eroding demand for government debt; and no government appears willing or able to make cuts to expenditure.

Take the US as an example: the amount it owes is now over $40 trillion; it spends a whopping 34% more every year than it makes in tax revenues, which means it has to borrow $2 trillion a year on top to cover that gap; and its interest bill alone is already $1 trillion, more than it spends on defence (which, as I am sure you know, is by far the largest military spending in the world).

One way to handle a big debt pile without a crisis is to let inflation erode the real value of the debt. It’s more or less what happened after World War 2. The trouble is that inflation is like sugar: it’s quite hard to have just a little bit. And the signs are that the inflation we’ve seen since 2020 is, for one reason or another, proving tricky to get back under control.

Another thing you’ll hear from governments is that, yes, there’s a lot of debt, but they will conjure up faster economic growth to take care of it. Or a bit like trying to exercise your way out of a poor diet: “I know I’m having too many sweet treats and junk food but don’t worry: I’ll go to the gym 3 times a week and work it all off…” The great hope, of course, is a productivity boom as a result of AI. It’s far too early to tell if, how and when this transformation might take place.

In any event, all of this reminds me why I prefer investing in company equity – with unlimited upside, basically a bet on industry and innovation – than lending to governments or companies for a fixed return, with inflation eating away at the capital. But prolonged turmoil in the markets for US government bonds, until now universally considered to be the ultimate safe, risk-free asset, will hurt everyone, everywhere. The question is simply how it’s going to hurt.