WASHINGTON – The bond market is delivering a harsh verdict on Washington’s fiscal trajectory, and according to applied economics professor Steve Hanke, the long-dormant bond vigilantes are back, punishing government debt for a monetary policy he calls a “deadly cocktail.”
Hanke, a professor at Johns Hopkins and special counselor at the Center for Financial Stability, told Fortune that the ongoing selloff in U.S. Treasuries has already pushed yields beyond the informal “red line” that Treasury Secretary Scott Bessent has been attempting to hold. The yield on the benchmark 10-year note, which directly influences the mortgage rates and borrowing costs facing American workers, has climbed significantly, reflecting market anxiety over fiscal discipline.
Money Supply Driving Inflation “Genie”
Hanke attributes the selloff primarily to monetary forces. He points to the Divisia M4 money supply measure, tracked by the Center for Financial Stability, which is growing at a 6.7% year-over-year rate. This pace exceeds his own “Golden Growth Rate” of roughly 6%, a level he calculates as consistent with the Federal Reserve’s 2% inflation target.
“The inflation genie’s out of the bottle, and it’s not going back in,” Hanke said. He argued that inflation expectations—fueled by faster money growth—are the primary driver of higher bond yields, not just reported past inflation data.
This financial dynamic directly impacts domestic economic nationalism. Higher long-term yields translate into more expensive mortgages and car loans, placing additional strain on American households already coping with elevated prices, undermining any effectiveness of policies meant to prioritize domestic industry over globalist trade arrangements.
Fiscal Recklessness and the Vigilantes
The term “bond vigilantes,” coined by economist Ed Yardeni, refers to investors who sell government debt to enforce fiscal discipline when they see policymakers acting recklessly. Hanke’s assessment indicates these market actors have now returned from hibernation, challenging the Treasury Department’s apparent desire to cap yields. Hanke stated he expects the 10-year yield could climb another 50 basis points, and that he will remain bearish on bonds for some time.
The immediate concern for national economic management is that a further dislocation in the bond market could compel foreign holders of U.S. debt to liquidate holdings, sending yields even higher. Reports indicate Bessent’s focus has been squarely on the 10-year yield precisely because of its impact on consumer borrowing costs. The pressure on Washington comes as no surprise to those who note that corporate lobbying interests often benefit from easy monetary conditions, while American savers and wage earners bear the cost of devalued currency and rising prices.