300 years of wars show they are ‘always disaster times’ for holders of government debt because of inflation and financial repression

CEPR finds government bondholders suffered average real losses of ~14% in the first four years of wars, with cumulative inflation averaging ~20% and cumulative bond returns >20% below stocks and real estate. The report warns inflation and financial repression often erode debt value rather than defaulting; relevant as U.S. debt stands at $39T, the Pentagon seeks >$200B for the conflict, and the 10-year Treasury yield has risen >40bps in three weeks. Rising interest expense (~$1T/yr) and potential policy responses increase downside risk to Treasuries and could raise future borrowing costs.

Analysis

The market is repricing a structural risk: large fiscal shocks plus central-bank discretion create a non-linear regime for sovereign debt where nominal duration and real value can diverge sharply. That regime amplifies convexity losses for long-duration nominal holders and bloats term premia because dealers and long-term investors cannot rely on mechanical safe-haven demand the way they did in past recessions.

Second-order channels are underappreciated: banks and insurers with large regulatory or economic duration exposures face capital and liquidity stress when sovereign curves steepen, which can tighten credit supply and propagate to investment-grade corporates within 1–6 months. Foreign official holders also re-optimize reserves — a durable reallocation away from long-duration nominals would raise global funding costs and compress US policy space over years, not just weeks.

Trade timing is multi-horizon. Near-term (days–weeks) moves will be headline-driven and commodity-sensitive; medium-term (3–12 months) outcomes depend on whether fiscal tightening, revenue repricing, or explicit financial repression becomes the political equilibrium. Tail risks (years) include either a pivot to yield-curve control, which would crush term premia and reward duration holders, or sustained monetization, which would destroy real returns and lift hard-asset prices.

Consensus is over-simplifying: Treasuries aren’t binary “safe” or “toxic” — liquidity depth and reserve status create pathways for rapid policy reversals. The most actionable edge is asymmetric option/relative-value positioning that pays off if inflation/headline risk rises while limiting exposure if markets rally back to reflexive safe-haven bids.

Key Decisions for Investors

• Relative-value inflation hedge (3–12 months): Buy TIP (iShares TIPS ETF) and short IEF (iShares 7–10yr Treasury ETF) 1:1 by duration-equivalent notional. Rationale: capture widening breakeven if fiscal/news risk lifts inflation expectations; stop-loss if pair loses 4% from entry. Target: asymmetric payoff of ~2:1 if breakevens rise 30–50bps.
• Tail-protection on duration (0–3 months): Purchase TLT 3-month 25-delta put spreads (buy 25-delta, sell 10-delta) sized to cost ≤1.5% of notional. Rationale: convex protection vs a rapid repricing of long yields; limited premium outlay with 10–20% TLT moves producing 3–6x payoff on premium.
• Hard-asset inflation play (3–9 months): Long GDX (VanEck Gold Miners) sized to 1–2% of portfolio and hedge 30–50% market beta via short SPY. Rationale: miners leverage real-rate compression and geopolitical commodity shocks while hedge tempers equity correlation; target 2–3x upside if real yields fall 50bps.
• Credit/liquidity hedge (1–6 months): Buy protection via short-dated IG CDS indices or long-dated HYG puts (9–12 month expiries) sized to cap portfolio drawdown to target. Rationale: anticipate contagion from sovereign repricing into corporate funding; expect realized returns if spread widening >75–100bps, with loss limited to option premium.