The market is either irrational or expects monetisation of debt*

Government debt is safer than bank deposits...

If the banking system remains intact, then so too would be the Government debt market. The banking system relies on Sovereign debt; banking liabilities are valuable only because they are guaranteed by the taxpayer.

The Government debt market must be sound, if bank deposits are sound. If there is a bond market crash, the same applies to the banking system and in this scenario, the only protection will be to withdraw cash and place it under the mattress. In this event, it is likely that cash too would be worthless since we would then question why it cannot be redeemed for anything of value (since Bretton Woods). If Government debt fails, the entire monetary system is exposed.

There won't be a bond market crash without a banking collapse.


People are (apparently) of the view that there is no particular advantage in holding cash in the event of a financial collapse, perhaps because of its inherent worthlessness. There is no reason then, if cash is not wanted in that scenario, for the banking system, or bond markets to collapse.

Government debt is not valuable as a consequence of the Government's ability to accrue the money from taxpayers. It is valuable because the Government has promised to repay it (at some point) in the future. The promise itself (on demand, or otherwise) is valuable. The value of Government debt relies on the possibility to print the money. The possibility that the Government might monetise the debt, by printing, is where Treasuries derive their value.

The credit rating of Sovereign fiat debt is always reliable, since the Government has the ability to print the required sum. The debt of countries with a fiat currency generally has a high (safe) credit rating.


The low credit premium (high safety) of Sovereign debt indicates the end of the currency itself because it suggests the investor is indifferent to the apparent illogical pricing if we do not expect monetisation, or that monetisation is expected. The investor either expects monetisation, or doesn't care; in the latter case, having deduced already that fiat will be worthless and isn't bothered to exploit the temporary value, until the collapse.

Anyone that cares about fiat (doesn't think it worthless, already) must either expect monetisation or is waiting for others to act. An expectation of monetisation is the only rational explanation for the price of Sovereign debt.

*Within the context of fiat money being worth more than zero, which is itself irrational, unless we expect (some kind of) redeemability to be restored.