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What’s going to happen is fiscal dominance will increasingly collide with a synchronized global contraction and recessionary monetary policy. As the U.S. and other major economies weaken together, global demand, trade and credit creation will deteriorate, forcing central banks toward easing at roughly the same time and driving a powerful safe haven bid into long duration sovereign bonds. In the U.S., the 2 year yield will fall much faster than the 10 year as markets price aggressive Fed cuts, while the 10 year and 30 year also rally as investors seek liquidity, duration and protection from collapsing growth. That produces a classic bull steepener where the entire curve moves lower but the front end falls faster. Recession, disinflation and global risk aversion should dominate initially, allowing long yields to fall substantially before fiscal pressures begin pushing back. That is where fiscal dominance becomes the defining second stage. A synchronized downturn will widen deficits globally as tax revenues weaken and governments respond with stimulus, guarantees and support programs just as debt servicing burdens are already elevated. The initial safe haven bid can therefore drive long yields sharply lower, but enormous sovereign issuance and rising term premiums may eventually limit how long they stay there. The system becomes caught between global contraction pulling long rates down and fiscal dominance eventually placing a structural floor under them.

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