The 30-year Treasury yield closed at 5.62 percent on Sept. 30, territory last visited in 2002, as investors demanded more to lend to a federal government running deficits near $1.9 trillion, with the Congressional Budget Office projecting larger ones ahead.
The 10-year yield sits near 5.3 percent. The budget consequences are already severe: interest on the national debt reached $857 billion in the first nine months of the fiscal year, more than the government spent on Medicare or national defense. So reads an analysis published Saturday by Fortune, written by the economist Alexander William Salter, who argues the bond market is sending Washington a signal it keeps misreading.
One reading of the surge holds that investors are losing faith in the dollar. Gold has more than doubled in two years, and commentators talk of a “debasement trade,” with bondholders fleeing paper claims ahead of expected inflation. Mr. Salter argues the data disprove it. The 30-year breakeven rate — the market’s long-run inflation forecast — sits near 2.3 percent, which he calls unremarkable. The 30-year real yield, by contrast, has climbed above 3 percent, its highest level since before the 2008 financial crisis. Bondholders still expect the dollar to hold its value, he wrote; what has changed is the real price of financing the government.
Supply and demand explain why, in his telling. Public deficits now compete with a surge in private borrowing for the artificial-intelligence buildout — data centers, chips and electric power — and when demand for savings outruns supply, its price rises. That price is the real interest rate, and some of the pressure reflects a growing economy. But deficits at this scale, he wrote, crowd out the very investment that raises future living standards, and the arithmetic compounds: higher yields raise debt-service costs, which enlarge deficits, which require more borrowing at those same yields.
The Treasury Department’s response has so far been thin. In August, Secretary Scott Bessent doubled buybacks of 10- to 30-year debt after months of weak demand; yields fell on the announcement and fully reversed within a day. A $4 billion operation cannot move a market measured in trillions, Mr. Salter wrote, and improvisations undercut the “regular and predictable” issuance Mr. Bessent has championed. Struggling sovereigns often reach for such tactics, Krishna Guha, Evercore’s head of economics and central bank strategy, said recently, and the United States “is not different without limit.”
The lasting fix, the economist wrote, is a sustainable fiscal path built from tax increases and spending cuts — with limited room on taxes. Over 60 years, federal receipts have ranged from 14.4 to 19.8 percent of GDP, averaging 17 percent, and broadening the base by taxing the middle class, common in Europe, is “dead on arrival” in the United States. Spending, by contrast, follows a long upward trend that the budget office expects to steepen as entitlements and interest costs rise. Worth doing first, he wrote, is holding the growth of federal spending below the growth of the real economy.
His larger warning is about restraint. Congress, he wrote, has rejected every mechanism of it — budget rules, spending caps, revenue increases and entitlement reform — leaving bondholders as the only remaining check on federal borrowing. “They are unforgiving,” he wrote. “While they may tolerate profligacy for a while, they will eventually punish it.” Nations that wait for creditors to impose discipline, he said, get crisis-driven austerity instead of deliberate reform.
The near-zero rates that ran from 2008 to 2020 taught borrowers, Congress most of all, to treat capital as basically free, Mr. Salter wrote. A 3 percent long-term real yield, he said, means capital is scarce again. Those days are gone.