The Bond Market’s Supply and Demand Problem

Government debt-service costs rising relative to government revenue to unacceptably squeeze out spending. 

The supply of government debt becoming too large relative to demand for it, causing long-term interest rates to rise faster than short-term rates.

The government treasury shortening the maturity of its debt sales to reduce the supply of bond sales.

The currency weakening, particularly relative to hard asset storeholds of wealth such as gold.

With a further lag, higher interest rates hurting the prices of other investment assets like stocks and real estate, and, after another lag, hurting the economy and creating credit problems.

Central banks “printing” money and credit, purchasing bonds, and guaranteeing debt. 

Central Banks incurring large losses and monetizing their own debt. 

Late in the cycle, governments adopting more extraordinary measures to manage the growing mismatch between their debt offering and debt service obligations and their available financing. These measures can take the form of: shutting down banks or forcing bank mergers because the banks’ losses and lack of liquid funds make fully paying their depositors’ withdrawals impossible; unusual financial supports for systemically important companies; the establishment of capital controls to prevent money from leaving the country; and the outlawing of hard asset monies such as gold.   

The process reaches a breaking point when debt service crowds out essential spending, bond supply overwhelms demand and pushes interest rates higher, or central-bank money creation becomes excessive and undermines the value of the currency.