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One of the key concepts in macro right now is Fiscal Dominance.
The recent gigantic fiscal stimulus announced by the new Japanese PM Takaichi has ignited the fiscal dominance discussion again. Given my forecast for sustained global money printing in 2026, I believe the topic will gain further traction – so here is an update of where we stand.
My definition of Fiscal Dominance applies when a country embarks in large primary deficits with core inflation already above target and a Central Bank that is not applying tight enough policy to counter this.
Bonus points if you are also a net debtor to the world (negative NIIP), with a caveat for the US which issues the global reserve currency for now.
The result is that inflation expectations increase but front-end yields are pinned by a dovish CB (5-year real yields are low) and the release valve lies in long-end bonds (30-year nominal yields) moving up fast.
This is why my ’’Fiscal Dominance Spread’’ as measured by the bond market is 30-year nominal yields minus 5-year real yields.
The table below shows all the key variables to track the Fiscal Dominance trade across multiple suspect countries.
UK and Japan are leading the charge, but the spread is also high in the US and catching up in places like Germany and Canada.
Do you think the bond market is right in pricing further Fiscal Dominance?
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