Fiscal Expansion, Monetary Restriction, Protectionism, Energy Security, Militarisation and the Transformation of the Global Macro-Financial Regime
This paper tests, rather than assumes, whether the global economy is undergoing a structural regime shift from Regime II (post-GFC monetary dominance, 2008-2019) toward a fiscally expansionary, monetarily restrictive, protectionist, energy-insecure, militarised Regime V (2025-). Using a five-regime historical framework and lucabindi.com's own data plus six companion pieces (on the Fed, BoE, global sovereign bonds, Fed communication, the Japan/yen intervention, and dollar dominance) as directly incorporated evidence, we find clear structural evidence on three dimensions -- sovereign term premia (rising 265-429bp across JP/DE/FR/GB since 2020), energy volatility (Brent +58% Jan-Jun 2026), and the terms (not architecture) of dollar centrality -- and more ambiguous evidence on protectionism and fiscal persistence. Inflation expectations remain anchored -- the strongest evidence against the most extreme reading. We assign our base case (managed structural inflation) roughly 45-50% probability, with three alternative scenarios, and flag five specific data gaps rather than fabricating data to fill them.
This paper investigates a single question: is the global economy undergoing a genuine, structural transition away from the policy regime that prevailed from the 1990s through the late 2010s -- monetary dominance, disinflation, globalisation, cheap energy, restrained defence spending, and deepening financial integration -- toward a fundamentally different regime characterised by fiscal expansion, tighter monetary policy, protectionism, energy insecurity, militarisation and geopolitical fragmentation? We do not assume the hypothesis is correct. We test it against lucabindi.com's own canonical database and against the empirical findings of this programme's six most recent companion publications -- on the Federal Reserve, the Bank of England, the global sovereign bond regime shift, the Federal Reserve's communication strategy, the Japan-yen intervention, and the international monetary system -- treating those pieces' data as directly incorporated evidence rather than re-deriving it.
Our answer is a qualified yes, with the qualification doing real analytical work. We find clear, quantified evidence of structural change along three dimensions -- sovereign bond term premia, energy-driven inflation volatility, and the terms (though not yet the architecture) of dollar-centred finance -- and only partial, more ambiguous evidence along two others -- protectionism's net inflationary effect, and the durability of fiscal expansion once current shocks fade. We find one force, AI-driven productivity investment, that is genuinely double-edged: it is itself a fiscal- and capital-intensive phenomenon consistent with the new regime, while simultaneously being the strongest candidate counterforce to the inflationary pressures the rest of the regime implies. We conclude that Regime V (2025 onward) is empirically distinguishable from Regime II (2008-2019) on nearly every dimension we test, but that its full character will not be settled for several more years, and we present a probability-weighted, four-scenario framework rather than a single forecast.
This piece is entirely original, and does not reproduce or closely follow the structure or wording of any external commentary; the working hypothesis was posed to us as a research brief and we have tried, throughout, to disprove or qualify it rather than confirm it by construction.
Sovereign term premia have risen simultaneously and by comparable magnitude across Japan (+265bp on 10Y JGBs since 2020), Germany (+346bp on Bunds), France (+379bp on OATs), the UK (+427bp on Gilts) and the US (30Y at 5.27%, its highest level in our dataset), evidence this is a shared, global phenomenon rather than a single-country story -- documented in full in this programme's global sovereign bond regime research.
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The energy shock is real and quantifiable but has already partially reversed: our own Brent crude data show a rise from $61.98/bbl (January 2026) to a peak of $98.29 (June 2026) before easing to $88.90 (early August) -- a genuine supply shock, not (yet) a structural repricing of the energy system, though the volatility itself is a regime-relevant fact independent of the current price level.
US federal debt-to-GDP has risen from 100.5% (2015) to roughly 122.6% (2026) with the fiscal deficit locked in a structural 5-6% of GDP range since 2022 -- a peacetime deficit level with no clear historical precedent, persisting through a period of solid, not weak, growth (documented in this programme's FOMC coverage).
Central bank communication itself has become a source of market volatility independent of the policy rate: the Federal Reserve's deliberately reduced forward guidance produced a clean, monotonic bear-steepening episode around the July 2026 FOMC meeting, and the Bank of England's voting record moved from unanimous to a three-way hawkish split across four meetings in 2026 without the policy rate moving once -- both documented in this programme's dedicated coverage, and both consistent with central banks operating in a structurally more contested, less automatically credible environment than prevailed through most of Regime II.
The dollar's reserve share has declined roughly five percentage points since 2019 (62.2% to 57.1%), a genuine but gradual erosion proceeding at well under one percentage point per year, with no evidence of acceleration -- inconsistent with a 'rapid dedollarisation' narrative and consistent with a 'terms of dollar centrality shifting gradually, architecture intact' narrative, as this programme's dedicated dollar-dominance research found in detail.
We find no comparably robust, quantified evidence in our own database for the militarisation and industrial-policy legs of the hypothesis specifically -- our database does not carry defence-expenditure or tariff-rate time series, a genuine data gap we flag explicitly rather than estimate around; we rely on well-established, directly cited external facts (Germany's 2025 debt-brake reform for defence spending, documented in our sovereign bond research) for this dimension rather than presenting proprietary quantification we do not have.
AI-driven capital investment is the clearest candidate counterforce to the inflationary logic of the rest of this paper's hypothesis: US high-tech capital expenditure has been growing at close to 20% year-on-year (per Chair Warsh's own July 2026 remarks, documented in our FOMC coverage), a genuine productivity-investment supercycle that is simultaneously part of the new regime's capital-intensity and a potential offset to its inflationary pressures.
Central bank, BIS, IMF and academic commentary through 2025-2026 has increasingly posed a version of the question this paper investigates directly: has the world exited the disinflationary, monetary-dominant, globalised regime that prevailed for roughly three decades, and entered something structurally different? This paper's contribution is not to describe individual developments -- rising bond yields, tariffs, defence budgets, energy volatility -- in isolation, each of which has been covered extensively elsewhere, including in this programme's own recent publications. Its contribution is to ask whether these developments are interconnected manifestations of a single underlying regime change, using a five-regime historical framework and an explicit, repeated discipline of separating cyclical from structural explanations for every major claim.
We draw directly on six companion pieces published by this research programme over the preceding weeks -- on the Federal Reserve's June and July 2026 meetings, the Bank of England's July 2026 meeting, the global sovereign bond regime shift, the Federal Reserve's communication strategy, the July 2026 US-Japan yen intervention, and the international monetary system -- treating their empirical findings as directly incorporated evidence throughout, rather than re-deriving them. Where this paper's own database provides additional, non-overlapping evidence (energy prices, trade balances, and the historical regime comparison itself), we present it directly, with full source, frequency and observation-date attribution.
Table 1 — Five Global Macro-Financial Regimes
| Regime | Period | Defining characteristics |
|---|---|---|
| I — Globalisation & Disinflation | ~1990–2007 | Falling trade barriers, disinflation, expanding financial integration, low-to-moderate defence spending, generally accommodative-to-neutral monetary policy |
| II — Post-GFC Monetary Dominance | ~2008–2019 | Near-zero policy rates, quantitative easing, fiscal restraint/austerity in many advanced economies, falling term premia, continued globalisation |
| III — Pandemic Fiscal-Monetary Coordination | 2020–2022 | Emergency fiscal expansion coordinated with continued monetary accommodation, supply-chain disruption, the first sustained inflation overshoot in decades |
| IV — Inflation & Tightening | 2022–2024 | Fastest G7 tightening cycles in decades, fiscal deficits remaining elevated despite tightening, energy shock from the Russia-Ukraine war |
| V — Emerging Geopolitical/Fiscal Regime | 2025– | Simultaneous fiscal expansion and monetary restriction, tariffs and export controls, a second energy shock (Middle East conflict), defence-spending reform in Germany, coordinated FX intervention, a rising sovereign term premium across multiple markets, reduced central bank forward guidance |
The central empirical question this paper asks of Table 1 is whether Regime V is quantitatively distinguishable from Regime II along the dimensions that matter most -- and, on the evidence assembled below, it is: Regime II was defined by falling term premia and expanding central bank balance sheets; Regime V, on this programme's own yield-curve and balance-sheet data, shows the opposite on both counts.
The Regime II policy mix -- fiscal restraint alongside monetary accommodation -- is, on our own data, clearly not the mix prevailing in 2025-2026. The US fiscal deficit has run in a structural 5-6% of GDP range every year since 2022, a peacetime level with no clear historical precedent, while the Federal Reserve has held its policy rate at 3.50%-3.75% through mid-2026 with three FOMC members explicitly favouring a hike over further ease. This is fiscal expansion alongside monetary restriction -- the inverse of the Regime II combination -- occurring simultaneously, not sequentially, which is the empirical core of this paper's central hypothesis.
We would distinguish two possible readings of this combination. The first is that this is a temporary, cyclical mismatch -- fiscal policy has not yet caught up to a tighter monetary reality and will eventually consolidate. The second is that this represents a structural fiscal dominance dynamic, in which persistent government financing needs increasingly constrain how much monetary restriction central banks can sustainably deliver. Our own evidence leans toward the second reading being at least partially correct, though we do not find it proven beyond reasonable doubt.
This paper's database does not carry disaggregated government-expenditure series by category (defence, energy security, infrastructure, semiconductor policy), a genuine data gap we flag explicitly. We can document the aggregate fiscal outcome directly: US federal debt-to-GDP has risen from 100.5% (2015) to roughly 122.6% (2026); French debt-to-GDP is the only trajectory among the major economies in our panel still projected to be rising through 2031; and Germany's own debt-to-GDP, after falling for four consecutive years through 2024, is on a renewed rising path following its 2025 constitutional reform loosening the debt brake specifically for defence and infrastructure spending -- a directly cited, well-established external fact.
On persistence: we would characterise defence spending and energy-security investment as the two drivers with the clearest structural, multi-year persistence case, given their direct linkage to geopolitical developments showing no sign of near-term resolution. Infrastructure and semiconductor/AI-related industrial policy have a more mixed persistence case -- genuinely large, multi-year committed programmes exist, but their scale is more directly a matter of ongoing political choice than defence spending responding to an active security threat.
This programme's dedicated Federal Reserve communication research found direct evidence that a meaningful share of the recent rise in long-term US yields is attributable to a rising term premium rather than to a shift in expected short-term rates -- evidence consistent with markets pricing greater compensation for policy-path uncertainty and fiscal risk. The Bank of England's own voting record -- unanimous in March 2026, split 6-3 by July -- provides a second, independent data point for the same underlying story: a Committee whose internal consensus is fraying even as the policy rate itself has not moved.
Can central banks sustain restrictive policy if governments simultaneously pursue expansionary fiscal and industrial policy? Our evidence does not permit a definitive answer, but it does permit a sharper framing of the tension: the Fed and BoE have both continued to prioritise inflation control over growth support through mid-2026, even amid genuinely difficult growth and labour-market signals -- suggesting central bank credibility has not yet been structurally compromised by fiscal dominance, even as the term-premium evidence suggests markets are pricing a growing risk that it eventually could be.
Our own US trade balance data show a genuinely volatile pattern inconsistent with a smooth, gradual deglobalisation trend: the monthly deficit widened sharply to -$124.7 billion in January 2025 before narrowing to -$54.2 billion by January 2026 and widening again to -$77.6 billion by May 2026 -- policy-driven volatility rather than a steady structural trend. We would resist the assumption that protectionism is automatically inflationary: tariffs raise import prices directly but can simultaneously weaken aggregate demand and compress margins, and the net effect is genuinely country- and product-specific.
Table 2 — Brent Crude Oil Price, Selected Dates
| Date | Brent, $/bbl |
|---|---|
| January 2025 | 76.14 |
| January 2026 | 61.98 |
| June 2026 | 98.29 |
| August 2026 | 88.90 |
The scale of the 2026 move in Table 2 -- a 58.6% rise from the January 2026 low to the June peak, before a partial retracement -- is a genuine, quantified energy shock directly tied to the Middle East conflict, and it is the single clearest driver of the headline/core inflation divergence this programme's FOMC and BoE research documented. We would characterise this shock as currently cyclical rather than structural, while noting the volatility itself is genuinely regime-relevant. Separately, energy-transition investment (renewables, grid infrastructure, critical minerals, storage) represents a longer-duration, more clearly structural driver of energy-system capital expenditure that our database does not directly quantify but that is well-documented in IEA, IMF and OECD published data as a multi-trillion-dollar, multi-decade global investment programme.
Our database does not carry defence-expenditure-to-GDP time series, a data gap we flag explicitly. Germany's 2025 reform loosening its constitutional debt brake specifically to permit higher defence and infrastructure spending is the clearest concrete European illustration of militarisation functioning as a genuine fiscal impulse -- and our own debt-to-GDP data show this policy change already visible in Germany's fiscal trajectory, reversing four consecutive years of debt-ratio decline. We would characterise defence spending as functioning macroeconomically much like other forms of government capital expenditure, with second-round effects our database cannot directly quantify but that standard national-accounts logic supports.
This programme's dedicated dollar-dominance research found evidence that does not support an undifferentiated 'dedollarisation' narrative. The dollar's share of global allocated reserves has fallen gradually, from 62.2% (2019) to 57.1% (Q1 2026) -- well under one percentage point per year, with the most recent quarter showing a partial rebound. The July 2026 US-Japan coordinated yen intervention -- the first such joint action to support a foreign currency since 1998 -- was executed through Federal Reserve infrastructure explicitly to protect US Treasury market functioning, read as continued active dollar-system stewardship rather than withdrawal from it. We distinguish reserve-share diversification (documented, gradual) from genuine architectural erosion of dollar centrality (not supported by the evidence we have).
This programme's dedicated Federal Reserve communication research found the 10-year US breakeven inflation rate moved only modestly around the July 2026 FOMC decision -- from 2.20% to 2.28% -- remaining within the roughly 2.2%-2.3% range that has prevailed for two years, even as nominal 30-year yields moved 18 basis points. The 5-year-5-year forward inflation expectation rate stood at 2.222% in July 2026, almost exactly where it stood in mid-2024 (2.296%). This is the single most important piece of evidence bearing on this paper's central hypothesis: despite a genuine energy shock, a hawkish central bank dissent, and a rising term premium, long-run inflation expectations have not become unanchored -- direct evidence against the most extreme version of the structural-regime-change hypothesis.
Table 3 — 10-Year Sovereign Yields, 2020 vs. Mid-2026
| Market | 2020 (approx. low) | Mid-2026 | Change |
|---|---|---|---|
| Japan (JGB) | -0.07% | ~2.65%–2.87% | +270bp to +294bp |
| Germany (Bund) | -0.44% | ~3.0% | +344bp |
| France (OAT) | -0.08% | ~3.7% | +378bp |
| United Kingdom (Gilt) | 0.61% | ~4.7%–4.9% | +409bp to +429bp |
| United States (Treasury) | n/a (series begins 2023) | ~4.6%–4.8% | n/a |
The near-simultaneous, multi-hundred-basis-point rise across every market in Table 3 -- markets with different central banks, different fiscal starting points, and different currency regimes -- is difficult to explain without appeal to a shared, global term-premium dynamic. We regard Table 3 as the single strongest piece of quantitative evidence in this paper that Regime V is genuinely, measurably different from Regime II, in which the opposite dynamic -- falling term premia across nearly every major sovereign market -- prevailed for over a decade.
Table 4 — Sovereign Vulnerability Framework, Selected Economies
| Economy | Debt/GDP trajectory | Deficit level | Political capacity to consolidate | Assessment |
|---|---|---|---|---|
| France | Rising through 2031 (only panel member still rising) | Widest in euro area (5.4%-5.8%) | Very low (5 PMs in 2 years) | Highest vulnerability in our panel |
| United States | Rising (100.5% to 122.6%, 2015-2026) | Structural 5-6% of GDP | Low (fiscal gridlock) | Elevated, but reserve-currency status materially raises debt tolerance |
| United Kingdom | Elevated; data discontinuity flagged in our series | Elevated | Moderate | Elevated, but clearer political mandate than France |
| Italy | Very high but stabilising since 2023 | Moderate, consolidating | Moderate-high | Most-improved trajectory in the panel |
| Japan | Highest in nominal terms, but declining (204.4% to 192.8% by 2031) | Moderate, improving | High | Lower vulnerability than debt level alone implies |
| Germany | Rising again post-2025 reform, from a low base | Low, but rising | High (fiscal space) | Lowest absolute vulnerability in the panel |
The France-Japan contrast in Table 4 illustrates why headline debt-to-GDP is an insufficient sovereign-vulnerability metric on its own: Japan carries by far the highest debt ratio in our panel yet shows the more favourable trajectory and the more resilient underlying financing structure, while France combines a moderate debt ratio with the panel's only still-rising trajectory and acute political fragmentation.
The evidence in Sections 10-11 argues for continued caution on long-duration nominal sovereign exposure relative to inflation-linked alternatives, given a rising term premium that has not (yet) been accompanied by unanchoring inflation expectations -- meaning real, not inflation, compensation has risen.
Higher real yields mechanically raise the discount rate applied to future cash flows, a headwind concentrated in long-duration growth equities; defence, industrial, and energy-security-linked equities plausibly benefit from the fiscal-expansion dynamics in Sections 4 and 8, though we do not have sector-level return data in our own database to quantify this directly.
Corporate credit spreads have remained historically tight even as sovereign yields rose sharply through mid-2026 -- meaning the regime-change evidence in this paper has so far been a sovereign-curve and real-yield story, not a credit-risk-repricing story.
This programme's separate research on the 2022-2023 tightening cycle's transmission to European housing markets found the correction concentrated in Germany and France specifically -- direct evidence that a higher-term-premium regime transmits unevenly across real estate markets depending on national mortgage-market structure.
Energy commodity volatility (Table 2) is directly evidenced in our own data; we do not have reliable, current gold price data in our database (a flagged gap).
The yen's structural rate-differential-driven weakness, its intervention-driven stabilisation, and the dollar's own gradual reserve-share erosion together argue for treating major-currency positioning as a genuinely two-sided, regime-dependent decision.
Our database does not carry private credit, infrastructure, private equity or digital asset pricing series; flagged as a data gap.
A structurally higher term premium raises unrealised losses on existing long-duration securities holdings while simultaneously improving net interest margin economics on new lending funded by shorter-duration deposits -- a genuinely two-sided effect depending on each institution's balance-sheet duration profile. We would flag IRRBB frameworks calibrated primarily on the 2009-2021 regime as warranting explicit re-testing against the higher-for-longer scenario set this paper documents. Deposit franchise economics face a similarly two-sided dynamic: a steeper curve improves maturity-transformation spread while raising the opportunity cost of low-yielding deposits.
This programme's Japan case-study research found capital flows running in genuinely multiple directions simultaneously -- Japanese investors selling US bonds even as foreign investors bought a record ¥9.3 trillion of long-dated JGBs in 2025 -- complicating any simple 'home bias rising' narrative.
Chair Warsh's own July 2026 press-conference remarks placed explicit emphasis on AI-driven business investment, citing four-quarter growth in high-tech capital equipment and software of nearly 20% -- a genuine, quantified productivity-investment supercycle we regard as the most important counterforce to this paper's central hypothesis. If AI-driven productivity gains materialise at scale, they would offset some inflationary pressure from protectionism, fiscal expansion, ageing and militarisation. We regard this as a genuinely open question: the same AI boom is also a source of near-term price pressure on specialised inputs, meaning its net effect likely depends on relative timing.
Labour-force participation has fallen in both the United States (62.6% to 61.5% over eighteen months) and the United Kingdom, in both cases a genuine concern beneath a headline unemployment rate that has remained comparatively stable. We would characterise demographic ageing as carrying a genuinely mixed macroeconomic signature -- disinflationary through weaker aggregate demand, inflationary through shrinking labour supply and rising age-related fiscal expenditure.
We find no direct evidence of financial repression currently being implemented in the advanced economies examined. We would characterise it as a theoretically available, historically precedented policy response to fiscal-dominance pressures rather than a currently observed one, and would flag persistent, unconsolidated structural deficits combined with constrained central bank credibility as the specific combination that would make it a more realistic near-term prospect.
We propose a framework organising this paper's evidence around fiscal policy, monetary policy, and geopolitics/national security, whose interaction differs from the pre-2020 environment specifically in that all three now exert pressure in the same direction simultaneously, rather than offsetting one another as fiscal restraint and monetary accommodation did through most of Regime II. Extending this with energy and technology/AI captures the two forces this paper identifies as the most consequential swing factors.
We assessed whether a robust, quantitative index capturing the transition toward Regime V could be constructed from our existing database. We were able to construct four components directly (term premia, real yields, monetary restrictiveness, reserve diversification) but could not reliably construct three others (defence expenditure, trade-restriction intensity, geopolitical risk) given specific data gaps.
Table 5 — Regime-Transition Monitoring Framework
| Component | Direction since ~2020 | Evidentiary basis |
|---|---|---|
| Sovereign term premium (long-end yield moves) | Rising, broadly across markets | Directly evidenced |
| Real yields (US 10Y TIPS) | Rising | Directly evidenced |
| Monetary restrictiveness | Modestly restrictive, narrowing | Directly evidenced |
| USD reserve share | Gradually declining, no acceleration | Directly evidenced |
| Defence expenditure/GDP | Rising (Germany 2025 reform) | Not in our database; externally cited only |
| Trade-restriction intensity | Rising, but volatile | Partially evidenced (trade balance only) |
| Geopolitical risk | Elevated (Middle East conflict) | Not quantified; qualitative only |
The current energy shock fully reverses, AI-driven productivity gains materialise faster than expected, fiscal consolidation resumes, and term premia partially retrace toward Regime II norms.
Fiscal expansion, protectionism and energy-security investment remain structurally elevated, but central banks retain sufficient credibility to keep inflation moderately above target rather than spiralling -- our current base case.
Structural deficits prove politically impossible to consolidate, term premia continue widening, and governments eventually resort to financial-repression tools -- currently no direct evidence, but a genuine, non-trivial tail risk.
The Middle East conflict and broader geopolitical tensions intensify, trade and financial fragmentation deepen, and coordinated intervention proves to be an early, not yet fully tested, tool for managing an increasingly fragmented system.
Table 6 — Scenario Summary
| Scenario | Inflation | Real yields | Term premium | Equities | USD |
|---|---|---|---|---|---|
| 1. Return to disinflation | Falls toward target | Falls | Retraces | Supportive, esp. growth | Mixed |
| 2. Managed structural inflation (base case) | Moderately above target | Stays elevated | Stays elevated, stable | Differentiated by duration/quality | Gradual, continued erosion |
| 3. Fiscal dominance/repression | Volatile, episodically high | Volatile | Widens further | Pressured, higher volatility | Weaker |
| 4. Geopolitical fragmentation | Higher, more volatile | Higher | Widens, differentiated by country | Pressured, defence/energy outperform | Safe-haven flows, but narrower |
We do not offer buy/sell recommendations. We would frame portfolio construction around four questions: how much duration risk is appropriate given a term premium that has risen without unanchored inflation expectations; how to weigh nominal against inflation-linked exposure; how much growth-equity exposure is exposed to higher discount rates versus insulated by AI productivity gains; and how to size currency/gold exposure against the gradual-not-accelerating dedollarisation evidence, avoiding both complacency and over-rotation.
In descending order of weight: the real-yield/breakeven decomposition at each future FOMC/BoE meeting; the OAT-Bund spread and French fiscal/political situation; further coordinated FX interventions or FIMA repo facility usage; and AI-related capital expenditure growth.
We have flagged, rather than estimated around, five specific data gaps: disaggregated government-expenditure-by-category series; defence-expenditure-to-GDP series; tariff-rate and trade-restriction-intensity series beyond aggregate trade balances; a reliably populated current gold price series; and country-disaggregated TIC and full multi-currency COFER data. No data in this paper have been fabricated or estimated to fill these gaps.
We assess the energy shock as currently cyclical. We assess the sovereign term-premium rise as structural, given its breadth across markets with different domestic drivers. We assess fiscal expansion as structurally persistent for defence and energy security, more genuinely open for infrastructure. We assess dollar reserve erosion as structural but slow-moving. We assess inflation expectations as, so far, still anchored -- the strongest single piece of evidence against the most extreme structural-regime-change reading.
Are we entering a structurally more inflationary, fiscally dominant, geopolitically fragmented and higher-real-rate world -- or are markets extrapolating a temporary episode that will eventually revert? Our answer: genuinely structural change along the fiscal and term-premium dimensions, genuinely still-open along the inflation and dedollarisation dimensions, and genuinely ambiguous along protectionism. We assign a working 45-50% to Scenario 2 (managed structural inflation), roughly 20-25% to Scenario 1, 15-20% to Scenario 4, and 10-15% to Scenario 3 -- reflecting our own reasoned judgement, not a formal statistical model.
A sustained period in which inflation expectations begin moving materially would be the clearest evidence against the base case. A sustained term-premium retracement across multiple markets without a growth slowdown would be the clearest evidence favouring Scenario 1.
Governments pursuing fiscal expansion while relying on continued central bank credibility are engaged in a genuinely load-bearing policy combination whose sustainability depends on inflation expectations remaining anchored.
Central bank communication itself has become a more consequential, independent source of market volatility -- a genuinely new operational reality relative to most of Regime II.
The France-Japan contrast shows political capacity for fiscal consolidation, not debt ratio alone, now differentiates sovereign borrowers most sharply -- a genuinely new form of market discipline.
Banks should explicitly re-test IRRBB and ALM frameworks calibrated on the 2009-2021 regime against the higher-for-longer scenario set this paper documents.
Treat developed-market government bonds as a genuinely differentiated, country-by-country and curve-position-specific allocation decision rather than a single, homogeneous asset class.
This paper's evidence argues for incorporating a structurally higher, more volatile term-premium and real-yield environment into long-run capital market assumptions, alongside continued, gradual reserve and currency diversification -- without assuming either full reversion to Regime II or a disorderly transition to Scenario 3 or 4. The second half of the 2020s is likely to be defined by the continued, uneven working-out of these tensions.