Jan 18th 2026|Washington, DC|3 min read
Listen to this story
AI Narrated
There are two surefire ways for a country to terrify bondholders. One is running up vast debts with no hint of a plan to get borrowing under control. The other is to capture the central bank, so interest rates follow political expediency, not sound economics. Both at once tend to be the preserve of mismanaged emerging economies. And now, if you squint only a bit, also America.
Donald Trump has been on the warpath against the Federal Reserve, demanding cuts to interest rates. On January 11th Jerome Powell, the Fed chair, said he was facing a federal criminal probe relating to the high cost of sprucing up the central bank’s headquarters. The president has made zeal for sharp interest-rate cuts a prerequisite for anyone who wants to succeed Mr Powell when his term ends in May. Meanwhile, the tax law Mr Trump signed last year locked in the fattest deficits in American history outside wartime, pandemic or global financial crisis. How much buying Greenland, on which the president now seems intent, would swell it further is anyone’s guess.
So you would expect holders of American Treasury bonds to be freaking out. But if Mr Trump’s antics spooked investors, they did not show it. Kent Smetters of the University of Pennsylvania reckons that long-term yields would be over a percentage point lower if America’s debt problem were under control. Even so, yields on Treasuries, which move inversely to prices, are lower than they were a year ago—and have declined by more in that period than yields on ten-year government bonds in any other big rich economy of the G7 (see chart 1). Barring a jolt in April, when Mr Trump launched his unprovoked trade war, in other words, the bond vigilantes have spared America.
Chart: The Economist
Other measures paint a similarly rosy picture. Treasuries’ “convenience yield”, which reflects the premium investors demand above the present value of future cashflows, is within historical norm and has actually narrowed in recent months, calculates Robin Brooks of the Brookings Institution, a think-tank (see chart 2). The dollar, which in the middle of last year looked weaker than what you would expect based on short-term factors such as cross-country differences in interest rates, is back in line with dull macroeconomics, reckons Steven Kamin of the American Enterprise Institute, another think-tank.
What is going on? One answer is that for all of America’s fiscal sins, it looks chaste enough compared with the rest of the rich world. Japan is burdened by colossal debts. France is in a slow-burning fiscal crisis. Britain remains stuck in a low-growth, high-tax funk. Uncle Sam may be indebted up to his ears but at least the American economy is still growing and its demography looks less dire than in other rich places. Its sheer scale, and the dollar’s unique position in the global financial system, are additional virtues. Plus hand-wringing over America’s deficits is hardly new and acting on such worries has historically been an easy way to lose money.
Chart: The Economist
Another possibility is less cheery. Bonds do well when growth falls and markets price in lower interest rates. This makes the higher coupons locked in for existing bonds look more attractive. And American growth, though solid, has slowed—especially relative to what it might have been had Mr Trump not pursued anti-growth policies such as tariffs and mass deportations. The test for this explanation will come if growth accelerates in 2026 as Mr Trump’s tax cuts take full effect.
A third explanation could be that the market is getting things wrong. Traders are accustomed to dealing with small changes in growth and inflation. The impact of Mr Trump’s radical ideas, about tariffs, immigration, Fed independence and much else besides, is harder to price in. When inflation surged in 2021-22 for the first time in 40 years markets were slow to twig that the Fed would need to ratchet up interest rates. The risk is that once investors do change their mind, their new beliefs are tough to budge. ■
For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter.
The Economist Today
A daily newsletter with the best of our journalism
Yes, I agree to receive exclusive content, offers and updates to products and services from The Economist Group. I can change these preferences at any time.