Prof G Markets · Sep 29, 2026 · 15m · 5m saved
With Michael Green, CEO and CIO of Tier1 Alpha Asset Management, known for his research on how passive investing moves markets
Credit default swaps on US government debt are getting cheaper while Treasury yields climb, Michael Green said, which is the opposite of what a market worried about US solvency would do.
Most commentators read the sell-off as a verdict on deficits. Green said it is a side effect of how bond indexes are built, because funds that track them buy less of a bond once it trades below its face value.
"It's simply a function of how we've decided to build the indices that is creating most of the behavior that we are seeing at this point."
Michael Green, CEO and CIO of Tier1 Alpha Asset Management, on Prof G Markets, made his name arguing that passive index funds distort stock prices. In this interview he applies the same argument to government bonds.
The full interview is covered here so you can skip it. 15 minutes of audio, 10 minutes of reading.
Here are the 8 calls that matter.
Key Takeaways
The bond sell-off is mechanical, not a judgment on US finances, in his view
Low-debt Australia is selling off too, while Switzerland and China are not
Credit default swaps, inflation swaps and the dollar all point the other way from the fiscal story
Long-dated bonds trading below 50 cents on the dollar are a neglected asset he called almost certainly underpriced
It is a buying opportunity, but nobody can know where a mechanical sell-off stops
Raising rates to fight war-driven inflation is counterproductive, he said, because it pays more to people who already hold bonds and cash
3.5% inflation during a Middle East war is not the problem; the level of prices against incomes is
The Treasury has figured this out and the Fed has not, he said, and he does not think Kevin Warsh is ready to
1. A Mechanical Sell-Off
The host opened with the market: Brent crude as high as $108 a barrel after President Trump rejected Iran's proposal to reopen the Strait, the 10-year Treasury yield "coming up close to 5.3," the "30-year yield above 5.5%," and the odds of an October rate hike at 70% on Kalshi. He asked what the bond market was saying.
Index design, not investors, is setting prices
Green said the mechanics he has described for years in stock-market passive investing are now playing out in bonds.
"And this is particularly problematic because the bond indices that passive vehicles reference was never designed as an investable product." — Michael Green
He said a bond index is built to represent the total quantity of bonds outstanding, not a specific risk someone would choose to hold. As a result, he said, little thought is going into the sell-off.
The deficit story does not fit across countries
He said the popular explanations, US or French deficits and high debt-to-GDP, are not borne out by the facts.
"If we look at a country like Australia, which has a low debt to GDP, it's experiencing the same sell-off." — Michael Green
Switzerland, which also runs deficits, and China, which sits outside Western bond indexes, are seeing very different behavior in their bonds, he said.
A bond below face value gets less new money
The mechanism, in his account: index strategies treat a bond trading below par (its face value) as much less attractive for new money than a bond trading above par, even from the same issuer with the same credit risk. He compared it with the dot-com cycle, when a badly built equity index showed passive investing's distorting effect at far lower levels of passive ownership than today.
"In the bond markets, this is not investment opportunity, this is a mechanical feature of how we've structured the markets, and ultimately we will have to address it." — Michael Green
