"Liz Truss" Bond Market Blow-Ups

Bond market blow-ups that also see the currency fall are increasingly common in the G10

Thank you for subscribing to my posts. If you’re not yet a paying subscriber, please consider becoming one. That’ll allow you to DM me with questions and comments. I plan to move my posts behind a paywall in coming months. Subscribing now locks you in at a low rate. Thank you so much for your support and feedback!

In yesterday’s post, I wrote about what it means to have a “Liz Truss” bond market sell-off. The “mini-budget” unveiled by the UK on September 23, 2022 caused gilt yields to spike violently as markets fretted about how tax cuts would bring even wider deficits. Ordinarily, higher yields cause currencies to rise, because it becomes more attractive to hold them, but that’s not what happened to the Pound. It fell sharply as investors exited not just gilts but the UK entirely.

This combination - rising yields and a falling currency - is historically rare in the G10. It’s more common in emerging markets (EM), given that institutions and policy enjoy less credibility and markets are - therefore - more likely to head for the exit. However, as public debt rises and political divisions mount, the G10 are losing this distinction and becoming more like EM, which means such crises of confidence are popping up with increasing frequency.

Today’s post looks at which other G10 economies have seen such crises of confidence in recent years. “Liz Truss” blow-ups are more common than you’d think. Japan has been in a slow-motion blow-up of exactly this kind for two years. The US experienced such a sell-off after “Liberation Day” in April 2025. Many high-debt countries in the EU would no doubt be in the midst of such sell-offs were it not for the Euro, which makes it harder for markets to go after them. The bottom line is that the list of “Liz Truss” sell-offs is longer than you’d think and rapidly growing. As institutions keep decaying across the G10, this is going to get worse before it gets better.

The black line in the four charts above is the trade-weighted currency index for the UK (top left), the US (top right), Japan (bottom left) and Switzerland (bottom right). A higher index means a stronger currency and vice versa. The blue line shows how the local bond market is doing vis-à-vis each country’s main trading partners. I show this differential for 10y10y forward interest rates, which I back out from 10- and 20-year government bond yields. The idea is to focus on the longer end of the yield curve, which is more sensitive to changing perceptions of sovereign risk.

The top left chart shows that the “Liz Truss” sell-off in 2022 was exceptionally violent and that the UK may be in the early stages of another such episode currently. The top right chart shows that the US suffered such a crisis of confidence after the roll-out of reciprocal tariffs in April 2025, while the bottom left chart shows that Japan has been in exactly this kind of sell-off for the past two years. Only Switzerland looks immune given its low public debt. If anything, its currency keeps rising as safe haven inflows push its yield down relative to those in its trading partners. Switzerland is the opposite of Japan: a currency that’s rising in spite of falling yields.

The bottom line is that “Liz Truss” bond market sell-offs are becoming more common across the G10 as debt levels rise and institutional integrity declines. The distinction between the G10 and EM is becoming blurred, which is one driver behind the rapid pace of appreciation of EM currencies against the G10.