Bank of America's chief strategist Michael Hartnett has advised clients to immediately sell UK and EU bonds. His recommendation comes as European countries plan significant increases in defense spending, which would be financed through borrowing, potentially causing market instability.

German bond yields have reached 15-year highs at over 3%, while UK yields have climbed to 27-year highs exceeding 5.5%. These elevated yields make government borrowing and debt refinancing increasingly expensive, with costs rising at an accelerating rate as European countries pursue rearmament programs.

Current German defense spending amounts to only 7% of US defense expenditure, while UK military spending represents 8% of US levels. This suggests European nations would need to increase their defense budgets approximately tenfold to match US capabilities as they seek greater military independence.

Hartnett predicts German bond yields will exceed US Treasury yields by year-end. This would signal that Germany faces a budget deficit similar to current US "wartime" levels, but without America's economic scale or monetary capabilities.

The most concerning scenario involves potential UK government bonds crisis stemming from dual problems:

• A significant budget deficit creating fiscal pressure
• A current account deficit showing the country consumes more foreign goods than it exports

This combination represents the most likely trigger for a peak in European risk asset prices, according to Hartnett. The situation reflects deeper structural issues in the UK economy that could spread to other markets.

Bank of America, with approximately $3.2 trillion in assets, delivers this analysis through its chief strategist to wealthy clients in straightforward terms. The message conveys urgency that European rearmament financing strategies could trigger significant market disruptions, starting with UK government debt markets.

Recent market movements support these concerns. German 10-year bonds experienced their largest weekly decline since 1990, with yields rising over 40 basis points to reach 2.84%. This coincides with coalition talks between Friedrich Merz's conservatives and the Social Democrats to revise Germany's borrowing limits for increased military spending.

The economic realities of modern warfare compound these financial pressures. Conventional defense systems prove cost-prohibitive against new threats like drones. A Ukrainian military commander recently noted that air defense interceptor missiles can cost six or seven figures while long-range drones cost mere thousands, making traditional defense financially unsustainable against Russia's reported production of 1.4 million drones.