Welcome to another Inside Solution One blog post. On today’s agenda: sovereign debt starting to crack, the Swiss safe haven, the Japanese carousel in its anniversary edition, the windfall tax, and why cryptocurrencies have deemed central banks not credible.
Cracks in sovereign debt, the Swiss safe haven and a year of the Japanese carousel
Bond yields in developed countries are starting to diverge, and for the first time in a long while the market is differentiating between the creditworthiness of individual states. In this post we analyse the debt situation in Europe, the United States and Poland, explain why the Swiss franc may become one of the strongest currencies of the coming period, review a year of the “Japanese carousel” thesis, comment on the windfall tax, and show why the crypto bull market is in essence a vote against the credibility of central banks.
Sovereign debt starts to crack
For several quarters we have maintained the thesis that a continued rise in bond yields at the current pace will lead to a debt crisis in which investors begin to re-price the solvency of the most indebted states. That process is now beginning. It is visible in the Swiss franc, in diverging government bond yields, and in the flow of capital from French to German debt. The comparison below is based on ten-year bond yields over a three-year horizon.
France. Public debt has risen in recent years from around 109–112% to 116% of GDP, and the bond yield is approaching 5%. The debt trend remains upward.
Italy. Debt at 137% of GDP, so clearly higher than in France, with a yield of around 4.75%. This is an important observation: despite the higher debt, investors price Italian risk lower than French risk, which indicates that factors other than the debt level itself are decisive.
Spain. A country that was synonymous with the debt crisis a decade ago now looks the best in the group of heavily indebted states. Debt stands at 100.7% of GDP and – unlike the others – is falling, which is reflected in yields.
Greece. Debt is steadily declining to 146% of GDP, and the yield remains just above 4.5%. In nominal terms the debt is still high, but the trajectory is better than in Italy and even in France.
Germany. Debt at 63.5% of GDP, stable, with a yield of 3.4%. The reference point for the entire euro area.
Poland. The level of debt remains low compared with Western Europe, although one must remember the substantial part of the debt held outside the budget in special-purpose funds, which makes comparisons difficult. The problem is the dynamics: the sharp increase in 2024–2025, with a forecast of further deterioration in 2026, has no equivalent in any of the countries analysed. Borrowing at this pace during good economic times and right after an episode of high inflation is hard to consider rational, regardless of the argument that the debt is denominated in the domestic currency.
The market prices Polish bonds at around 6.3%, but this is a yield in zloty, not in euro. For a meaningful comparison one has to subtract the interest rate differential between the NBP (3.75%) and the ECB (2.65%), i.e. one percentage point. The adjusted yield is around 5.25% – more than in France and Italy. This is not surprising: staying outside the euro area adds several dozen basis points of risk premium, because – as the case of Greece showed – a country belonging to the monetary union can count on support from its partners, whereas a country outside it cannot. With interest rates this low relative to the risk, a weakening of the zloty is a natural consequence.
United States. American debt, despite the media attention, does not look alarming compared with Europe, although it has risen recently. The ten-year yield reaches 5.25%, but Fed rates are around two percentage points higher than in the euro area. After adjustment we get around 4.3%, which in terms of credibility places the US on a par with Germany or slightly above. The recently published labour market data (NFP), weaker than expected, should bring short-term relief to both the equity and the bond market.
Where the interventions lead
The current crypto bull market began after the first major intervention in the US Treasury market; we are now observing another one. Every intervention means that the market interest rate on the dollar is kept below its equilibrium point. In an economy, such a disparity has to find an outlet elsewhere. Bond yields are always assessed in relation to inflation: if they are too low, the market concludes that real interest rates are negative or too low, and despite high nominal rates asset valuations rise. The outlet for yield manipulation should therefore be the equity market and alternative assets, including cryptocurrencies.
The Swiss safe haven
In this context the CHF/JPY pair, alongside AUD/JPY, remains our key exposure. Switzerland is one of the least indebted developed countries – public debt stands at 39% of GDP – and combines this with very low inflation and high institutional credibility. In recent quarters the franc has been outside investors’ focus, because the global narrative concentrated on rate hikes, and the Swiss National Bank has no reason for them. The mechanism is simple: low inflation and low government borrowing needs mean a small supply of bonds, a high price and a low yield. Swiss ten-year bonds offer around 0.5% per annum, and the base scenario assumes rates at 0% with no change.
If markets really do begin to price in the risk of a debt crisis, the franc should become one of the strongest currencies in the world. In our view a return of CHF/JPY to 200 is a matter of time. USD/CHF also remains an interesting pair, setting the currency of the least indebted developed country against the world’s reserve currency.
The EUR/CHF and USD/JPY analogy
It is worth recalling the episode of the defence of the 1.20 level on EUR/CHF. After the announcement that this level was inviolable, the rate rebounded at most to around 1.2650, i.e. by just over 5%. When the barrier was removed, the rate immediately fell to 1.05, revealing the gulf between the market price and the artificially maintained one. The rebound from 1.20 was purely speculative – fundamentally there was nothing behind it.
On USD/JPY the 160 level was communicated by the Bank of Japan not as a rigid barrier, but as an indicative intervention threshold. Subtracting 5% from 160 gives 152; the market fell to around 153, and counting from 164 the analogy closes almost perfectly. The scale of the rebound from the officially defended level thus turned out to be similar to that of the franc years ago. In our view the market equilibrium for USD/JPY is already significantly above 160 and moves higher with every month the intervention continues, and the current levels are a mirror image of that speculative move – this time downwards.
The Japanese carousel – one year on
A year has passed since we formulated the “Japanese carousel” thesis: rising Japanese bond yields, a weakening yen and a rising Nikkei. Every correction in the yen prompts voices that the thesis has stopped working, so it is worth setting the starting levels against the current ones. The yield on Japanese ten-year bonds has risen from 1.6% to 3%. USD/JPY has moved from 146 to 158. CHF/JPY from 185 to around 191 – after deep corrections along the way. The Nikkei has risen from around 44,000 to around 67,000 points, i.e. by 50%.
No trend moves in only one direction for a year, and the durability of this strategy has exceeded our original expectations. We believe, however, that it remains fully valid. The yen index and USD/JPY are again approaching the 160 level. AUD/JPY remains one of our preferred pairs, because the Kitchin model points to a continuation of the rise in commodities, on which the Australian economy is based.
The windfall tax
The government’s communication around the windfall profits tax suggests that its introduction will in itself lower fuel prices. No tax works that way. The actual mechanism is different: additional budget revenue creates room to reduce other levies – VAT on fuel falls from 23% to 8%, which is to cost the budget around PLN 6 billion a month, and in parallel excise duty is reduced, which is the more important factor here. The combined effect is estimated at PLN 1.2–1.3 per litre.
What stands out is the absence of any maximum price mechanism. In free-market conditions one would expect Orlen, as an entity with a duopolistic position, to compensate for the tax with higher margins. However, given the State Treasury’s control over the company, we consider this scenario unlikely.
Central banks not credible for cryptocurrencies
The crypto rally began after Treasury Secretary Scott Bessent’s first intervention in the bond market and is in essence a pricing of the loss of central bank credibility – understood as a reluctance to allow higher interest rates on traditional money. Since fiat money yields below its equilibrium point, capital heads to where supply is limited and where analogous manipulation is not possible. We share this assessment and remain invested in the crypto bull market.
The country most exposed to the consequences of this process is Japan, the most indebted country in the world. For years it was argued that debt in one’s own currency poses no threat. The mechanism, however, works differently: money printing raises the cost of financing, a higher cost of financing forces rate hikes, and rate hikes increase the cost of servicing the debt. With debt of around 250% of GDP, each percentage point means, in a major simplification, an additional 2.5% of GDP per year.
On the Bitcoin chart a clear predominance of demand over supply persists. Investors who have not yet built a position may find it difficult to enter – potential opportunities are a correction to around USD 85,500 and, in the event of a deeper pullback, the USD 82,300 level, although the wall of demand may not allow it to be reached. Ethereum is approaching USD 3,000. Thank you for your attention and see you next week!
