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Are we seeing the first signs of panic in Donald Trump’s Treasury? The US is by far the world’s biggest debtor, and the steady rise in global long-term interest rates – which I have long argued was inevitable – is starting to cause real pain.
Until now, the Treasury secretary, Scott Bessent, has dismissed concerns about US debt, which recently surpassed $40tn, as a big nothingburger. Growth, in his telling, will be so spectacular the US will easily be able to meet its interest obligations without any significant tax rises or spending cuts, while the rest of the world will happily keep feeding it money. But if Bessent really believes that, why is he trying to strong-arm the bond market by fiddling with the maturity structure of government debt?
The obvious first move, and the one the markets are looking for, is to address the underlying problem by reining in America’s massive federal deficit, which is now running at roughly 6% of GDP. Bessent has repeatedly assured markets that the Trump administration’s voracious borrowing is temporary, and that AI-led growth will generate an abundance of tax revenues that will soon bring the deficit down to a somewhat more manageable 3% of GDP.
That could happen, but there are many reasons to think that pain-free budget consolidation is wishful thinking, not least because AI profits are likely to prove much harder to tax than labour income. In the near term, the costs of supporting an ageing population, paying for what appears to be an inevitable surge in military spending and caving to intense populist pressure for more public spending will probably rise at least as fast as revenues.
Making matters worse, the premium on long-term US treasuries – a major part of the dollar’s “exorbitant privilege” as the global reserve currency – has largely evaporated. US debt no longer trades as a special safe asset relative to that of other advanced economies. The value of dollar dominance is thus fading even under the best of circumstances. And if budget pressures eventually trigger a crisis, the result could be a rapid loss of the dollar’s global market share that might otherwise take decades.
What, then, should the US Treasury do? The textbook answer, as Bessent well knows, is to take steps toward major budget consolidation, and not the blundering, heavy-handed random cuts that Elon Musk and his Doge acolytes pursued in 2025. Bessent’s problem is that his boss, Trump, understands that American taxpayers are not prepared for any kind of genuine austerity.
That is why Bessent’s turn toward bond buyback gimmicks is worrying. In effect, Bessent is promising to take long-term debt out of the system and replace it with short-term debt, much as the Federal Reserve does when it engages in quantitative easing. Such an approach can make sense in a panic, when there is a good chance long-term rates will come back down, but there is little evidence that the market is the one panicking right now.
In fact, global long-term real interest rates are rising everywhere, suggesting that US exceptionalism no longer applies, at least not to the same degree. Bessent has argued for some time that long-term rates are too high, favouring short-term borrowing as a way to wait out the spike that he believes will soon subside.
He may be right. Plenty of prominent economists, particularly those who have long insisted that interest rates would remain ultra-low for ever, still cling to the view that today’s elevated rates are an aberration. Unfortunately, studies based on historical data suggest that the recent increase is better thought of as a normalisation and that over the long term rates are more likely to rise than to fall.
With the national debt now exceeding $40tn, this is not the time to tell investors that there is “nothing magic” about that number. Taken with the growing fiscal deficit, higher long-term interest rates and mounting spending pressures, America’s debt burden is a very real concern.
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More troubling still, Bessent’s ham-fisted attempt to control the bond market undermines his hard-earned credibility as the safest pair of hands on the Trump 2.0 economic team. Until now, Bessent has managed to steer Trump away from some – albeit not all – of his most damaging impulses, whether on tariffs or the appointment of the Fed chair. Of course, he has to toe the line on hot-button issues near and dear to Trump’s heart, insisting that the US has in effect defeated Iran and that nothing will benefit working Americans more than upending the international trade order. Otherwise, he would be fired immediately. But bond markets are not so easily pushed around.
Bessent, the former bond trader and hedge fund manager, scored a major win when he supported the Argentinian peso last autumn, and he probably did not do too much damage by unexpectedly backing the Japanese yen over the summer, even if the effects faded fairly quickly. By contrast, his attempt at a Treasury-led quantitative easing has done little to stem the rise in long-term yields. Given that there is not going to be any meaningful debt reduction before November’s midterm elections, bond markets have good reason to remain deeply sceptical of America’s fiscal trajectory.
Kenneth Rogoff is a professor of economics and public policy at Harvard University. He was the IMF’s chief economist from 2001 to 2003.
