Wall Street isn’t just worried about inflation—it’s worried about Washington. And so are bondholders.
Despite inflation cooling and unemployment staying low, long-term interest rates remain unusually high. The yield on the 10-year Treasury has hovered above 4% for months—its highest sustained level in over a decade. What’s driving this stubborn resistance to lower rates?
It’s not inflation expectations. Those have moderated. It’s not economic growth. That’s slowing. Instead, the market is responding to something more fundamental: the federal government’s relentless appetite for capital.
This year alone, the U.S. will pay more than $1 trillion in interest on its debt—more than it spends on Medicare or defense. These are not crisis-level expenditures; they’re structural deficits baked into the baseline.
And despite record tax revenue—more than $4.4 trillion last year—the deficit still approached $2 trillion. That’s not a failure to collect; it’s a failure to restrain spending.
Each Treasury auction floods the market with new debt, and the buyers are demanding higher yields. Why? Because supply is overwhelming demand. The government’s thirst for capital is leaving less room for private borrowers, entrepreneurs, and long-term investors.
This is the classic crowd-out effect—and we’re watching it unfold in real time. Capital is being absorbed not by innovative private-sector ventures but by a government borrowing to finance existing obligations and entitlements.
Some argue that deficits don’t matter. But the bond market seems to think otherwise. Interest rates are telling a story that too few in Washington want to hear: there is a cost to unchecked borrowing, and we’ve entered an era where that cost is rising fast.
If we want to preserve low rates, high investment, and long-term growth, it’s time to confront the fiscal elephant in the room. That means reining in structural deficits—not just raising taxes, but rethinking the scale and scope of federal commitments.
The bond market is talking. Will Washington listen?
