The Bond Market Is About To Break Washington

Historically, when governments reach this stage, they choose to protect the debt market and sacrifice the currency.

The bond market is beginning to force reality onto Washington, and it may ultimately force an end to the Iran war long before politicians or diplomats are willing to admit it.

For months, investors have focused on missiles, retaliation headlines, oil chokepoints, and the possibility of a broader regional escalation from the Iran War. During the geopolitical noise, I urged readers not to overlook stress in financial markets that was happening before the war even started, namely in places like private credit and subprime auto lending. I called these “real crises” hiding behind record highs while “investors” chase gamma squeezes higher in an ongoing distortion feedback loop that is making things look far better than they are under the surface.

And now, beneath all the geopolitical noise, a much more serious, harder to ignore crisis is unfolding. As Cypher says in The Matrix:

"Fasten your seat belt Dorothy, 'cause Kansas is going bye-bye."

This crisis is in the Treasury market. Bond yields are moving sharply higher, and they are sending a message that policymakers can no longer afford to ignore: the financial system is becoming unstable under the weight of war spending, massive deficits, persistent inflation, and a debt load that was already unsustainable before this conflict began.

The bond market does not give a flying fuck about political narratives, gamma squeezes, meme stocks, retail investors or any other ticky tacky end-around style loopholes that continue to push stocks higher. It cares about math, fiscal policy and monetary policy. And the math is getting ugly very quickly.

The 10-year Treasury yield is arguably the single most important price in global finance because virtually every major asset class is built on top of it. Mortgage rates, commercial real estate valuations, private equity models, corporate borrowing costs, equity multiples, venture capital, and government financing itself all depend on stable Treasury markets. When yields rise too quickly, everything starts repricing at once. That is why this matters so much more than the daily moves in the stock market.

Washington understands this, even if it refuses to say it publicly.

The United States can survive political embarrassment overseas, but it simply cannot survive a disorderly Treasury market.

That is why I believe the bond market is eventually going to force a few things. First, a de-escalation of the Iran conflict. The priority now is no longer “victory” or even geopolitical strategy. The priority is restoring stability before bond yields spiral completely out of control. A prolonged war that keeps oil prices elevated while deficits explode higher is simply incompatible with a heavily indebted financial system already struggling under the burden of high interest rates.

The problem is that America entered this conflict from an extraordinarily weak fiscal position to begin with. This is not World War II, when the country had a young population, industrial dominance, low debt levels, and decades of economic expansion ahead of it. Today the US government is already running deficits approaching $2 trillion annually during what is supposedly a normal economic environment. Interest expense on the national debt has already become one of the largest items in the federal budget. Now add war spending, weakening foreign demand for Treasuries, rising commodity prices, and higher refinancing costs, and the entire situation starts looking dangerously unstable.

This is where the inflation problem becomes unavoidable.

War has always been inflationary, but not just because of oil shocks or supply chain disruptions. The deeper issue is debt creation itself. Wars are financed through borrowing, and borrowing at these levels increasingly requires central bank intervention one way or another. The process is actually very simple: war creates debt, debt pressures the financial system, and eventually the system responds through some combination of money creation, currency debasement, and financial repression.

That is exactly what the bond market is beginning to anticipate right now.

Ironically, as I’ve predicted the past week, before the Federal Reserve eventually steps in to suppress yields, we may actually see another round of rate hikes first. If oil prices remain elevated and inflation expectations continue rising alongside Treasury yields, the Fed may feel forced to tighten policy again simply to preserve credibility and prevent inflation psychology from becoming entrenched. If that doesn’t work, I’ve predicted that the Fed will simply start bullshitting its inflation numbers.

In other words, the system may briefly attempt to defend the dollar before ultimately surrendering to debt realities. That creates the possibility of a brutal stagflationary environment where growth slows, markets weaken, borrowing costs rise, and inflation remains stubbornly elevated at the same time.

And that…is a nightmare scenario for risk assets and a near-impossible job for incoming Fed chair Kevin Warsh.

New Fed Chair Kevin Warsh’s Job Is Impossible

For years, markets became addicted to near-zero rates and endless liquidity. Entire sectors of the economy were built on the assumption that capital would remain permanently cheap. But when Treasury yields rise meaningfully, everything changes. Leveraged speculation becomes harder to sustain. Corporate refinancing becomes more expensive. Housing affordability deteriorates further. Commercial real estate faces additional stress. Equity valuations compress. The “everything bubble” suddenly starts losing oxygen and all the shit I’ve written about that I think will blow up — including all 10 area of the market I highlighted here — will implode.

And once again, the people who get hurt the most will not be the financial elite, it will be ordinary Americans. You heard it from the former bartender turned Substack shit-talker first…read this slowly:

Mom and pop savers are about to get squeezed from every direction at once. Their wages will fail to keep up with inflation. Their borrowing costs will rise. Their credit card rates will stay elevated. Their insurance, food, energy, and housing costs will continue climbing. Their retirement portfolios will become more volatile. And eventually, after enduring all of that pain, they will likely watch policymakers step in to rescue the bond market and financial system through another round of monetary intervention that further destroys the purchasing power of their savings.

Every cycle ends the same way. Wall Street and the financial system are treated as too important to fail, while ordinary citizens absorb the consequences through inflation and currency debasement. Policymakers will present future interventions as necessary for “financial stability,” but stability for whom? Stability for leveraged institutions, overextended governments, and asset markets dependent on artificially suppressed rates.

Meanwhile, the average family gets punished twice. First through inflation, then through the policies used to contain the damage caused by inflation.

And make no mistake, if yields continue climbing, the Fed and Treasury will eventually intervene in some form. Maybe they will not officially call it yield curve control at first. Maybe it arrives through stealth quantitative easing, emergency liquidity facilities, Treasury buyback programs, bank regulatory changes, or coordinated purchases through the financial system. But the end result will be the same: suppress long-term yields because the debt burden has become too large for markets to absorb naturally.

At current debt levels, genuinely free market interest rates are politically and financially impossible. The bond market is beginning to expose that reality.

That is also why I am becoming bullish again on gold, silver, and mining stocks after stepping away from them earlier this year following their enormous run in 2025. If the Fed ultimately chooses to suppress yields while inflation remains structurally elevated, precious metals become one of the clearest beneficiaries. Gold and silver perform best when confidence in fiat systems deteriorates and when governments prioritize debt sustainability over currency stability. I’ve long said I think they will have a sharp fall lower on the initial deleveraging, then probably double off their near term bottom in short order once the Fed’s liquidity starts hitting the market.

And that is exactly the direction this appears to be heading.

The Iran war may end sooner than many expect, not because global leaders suddenly become responsible, but because the bond market is forcing them into a corner. Financial instability is becoming the greater threat. Policymakers now face an impossible balancing act between inflation, debt servicing costs, economic slowdown, and geopolitical conflict.

Something will have to give. Historically, when governments reach this stage, they choose to protect the debt market and sacrifice the currency.

There is little reason to believe this time will be any different.

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