Part 1 of 5 · Governance Topology × Sovereign Credit
When the Bond Vigilantes Sleep
Credit markets take an average of 4.7 years to price democratic erosion — and by then, it's often too late. A forensic analysis of lead-lag patterns across 32 countries and 225 years.
Of episodes, yields moved opposite to political risk
Worst Miss
−36 pts
US 2015–2025: Liberty collapsed, yields flat
Default Episodes
34
Across 91 countries, 1800–2025
Graphic 01
The Lag That Kills: Political Signals vs. Market Response
When liberty scores decline, credit markets should reprice. They rarely do — at least, not in time. The median gap between political deterioration onset and yield response is 4.7 years.
Liberty Decline vs. Yield Response: Timing Mismatch
Selected episodes of democratic erosion. Bar shows gap between liberty decline onset and yield spike.
Source: Governance Topology Dataset × Sovereign Credit Database, 1880–2025
Graphic 02
The Error Distribution: How Wrong Are Markets?
For every 10-point drop in Liberty score, yields should rise ~120bps based on cross-sectional regressions. The actual response? Markets systematically undershoot political risk.
Predicted vs. Actual Yield Change per Liberty Point Decline
Distribution of pricing errors across 665 country-year observations. Positive = market under-priced risk.
Source: Governance Topology Dataset. Error = implied fair-value yield minus actual yield.
Graphic 03
Vigilante Status Board: Asleep, Waking, or Alert?
We classify each country-period into four states: Asleep (liberty falling, yields flat), Waking (liberty falling, yields rising slowly), Alert (yields spike), Wrong (yields fall as liberty falls).
Bond Vigilante Status by Country and Period
Classification based on liberty velocity and yield response. Hover for details.
Source: Governance Topology Dataset × Sovereign Credit Database
Graphic 04
The Liberty-Yield Disconnect
In theory, lower liberty should mean higher yields — weaker institutions create greater default risk. In practice, the relationship is messy, non-linear, and often inverted during critical periods.
Liberty Score vs. Nominal Yield: All Country-Years
665 observations across 32 countries. Size = Debt/GDP. Red = default. Interactive: hover for details.
Source: Governance Topology Dataset × Sovereign Credit Database, 1800–2025
Graphic 05
Default Forensics: The Anatomy of 34 Sovereign Failures
Every default in our dataset was preceded by political deterioration. But credit markets only anticipated 38% of them. The rest? Pure surprise.
The 34 Defaults: Liberty at Time of Default vs. Yield Prior
Each bubble = one default event. X-axis = liberty score at default. Y-axis = yield 5 years before. Size = debt/GDP at default.
Source: Sovereign Credit Default Catalogue, Governance Topology Dataset
Graphic 06
The Divergence Map: Where Politics and Pricing Part Ways
A heatmap of the gap between political reality and market pricing across countries and time. Red cells show where markets dramatically under-priced political risk.
Political Risk Mispricing Heatmap
Color intensity = magnitude of divergence between liberty-implied yield and actual yield. Darker red = larger underpricing of risk.
Source: Governance Topology Dataset × Sovereign Credit Database
Graphic 07
The American Anomaly: Liberty in Freefall, Yields Shrug
The United States has experienced the fastest democratic erosion in the dataset — dropping from Liberty 94 to 48 in just 15 years. Yet Treasury yields remain anchored at 4.5%, as if nothing happened.
⚠️ METHODOLOGY NOTE: The PTI score of L≈48 reflects the author's real-time institutional assessment incorporating executive action pace through early 2026. Published indices score the US higher: Freedom House 83/100 (2024 report), V-Dem LDI ≈0.65–0.72 (scaled: ~65–72). The divergence reflects the PTI's faster update cycle, weighting toward institutional constraint erosion, and incorporation of events post-dating published index coverage. All claims should be evaluated under both the author's PTI and established indices.
United States: Liberty Score vs. 10-Year Yield, 1800–2025
Dual axis. Red line = Liberty score (left). Blue bars = 10-year nominal yield (right). Shaded = erosion period.
Source: Governance Topology Dataset × Sovereign Credit Database. Note: 2025 liberty score reflects accelerated institutional erosion.
The $2.2 Trillion Question: If markets fully priced US political risk at current liberty levels, the bivariate regression implies a large yield gap — but adding reserve currency status as a control (coefficient: −2,080bp) explains virtually all of the US yield anomaly (residual: 0bp). The true risk is potential loss of the reserve currency premium over 5–15 years if governance deteriorates. The reserve currency premium masks a structural mispricing that may be the largest in sovereign credit history.
Graphic 08
Current Risk Radar: Who's Next?
Countries where political signals are deteriorating but yields haven't responded — the bond vigilantes are still asleep.
2025 Mispricing Risk Score
Combined measure of liberty trajectory, current yield, and debt/GDP. Higher score = greater mispricing risk.
Source: Governance Topology Dataset × Sovereign Credit Database, 2025 estimates