Yields on long-dated government bonds are rising across the developed world, and the financial press is greeting the news with a chorus of self-congratulation: at last, the era of “repression” is over, and spendthrifts are being forced to pay their way. That framing is precisely backwards. The bond market is not disciplining the profligate; it is punishing the prudent, and what looks like a return to normalcy is the slow unbolting of the financing that built the modern middle class.
The 10-year Treasury ticked up to 4.8% on Tuesday amid a global bond selloff that sent Japan’s 10-year to a three-decade high. The U.S. 30-year reached 5.28%, while the U.K.’s 30-year gilt climbed to a 28-year high of 5.9%. Read those numbers straight. They are a warning, not a vindication.
This is exactly the crisis the easy-money era is now said to have avoided. A 10-year bond in the 4%-5% range was common before the 2008-09 panic — but it was common in a country with a smaller debt-to-GDP ratio, a younger workforce, a still-growing labor share, and an entitlement state that had not yet run out of working-age payers. None of those conditions still hold. Higher yields will not “restore price signals.” They will smother them, because the signal they are sending is one that no democracy can honor without gutting the promises it has made to its own citizens.
After the 2008-09 panic, central banks held interest rates at historically low levels and engaged in large-scale asset purchases of long-dated government bonds and mortgage-backed securities. Outside the United States they also bought corporate debt. Inflation stayed subdued. The reflexive conclusion among market commentators has been that this period was an aberration — that low rates amounted to a “subsidy” that “lulled” borrowers into thinking cheap money was the new normal. The opposite is closer to the truth. Low rates were the price of survival after a once-in-a-generation financial collapse, and the absence of inflation was a public good, not a market failure to be corrected.
Consider Illinois, which in 2010 issued five-year bonds to finance its pensions at a 3.854% rate. Then-Democratic Gov. Pat Quinn declared at the time, “This is a very successful deal for the State of Illinois and the 3.854% rate is proof the State’s economy is strong.” The cheap funding went exactly where it was supposed to go: into the pension obligations the state had already made to its public employees, promises that would otherwise have crowded out schools, public safety, and basic services. To describe that 3.854% coupon as evidence that “investors weren’t properly pricing credit risk” is to mistake prudence for pathology. California in 2017 issued bonds for its bullet train at a 2.193% rate. The train still isn’t close to being finished, and it may never be — but twenty-year infrastructure almost never pencils out at commercial rates, which is why state and local governments issue bonds for it in the first place. Cheap financing for long-gestation public works is the system working as designed, not as a cautionary tale.
Colleges used the cheap-money years to expand their physical plants and accommodate a generation of students who would otherwise have been locked out. That expansion is now under strain as demographics and enrollment patterns have moved against them — a real problem, but one rooted in tuition-policy choices and demographic decline, not in the cost of capital. Cheap mortgages helped fuel an expansion in housing construction that is now being choked off as owners feel locked-in by today’s higher mortgage rates, strangling first-time buyers. Penalizing the country for having built the largest pool of household wealth in its history is not discipline; it is confiscation by another name.
Pension funds and life insurers with long-dated liabilities reached for higher-yielding assets to meet those obligations. Bloomberg News reported last week that LeBron James borrowed nearly $300 million at a 4.8% rate from a pair of Midwestern life insurers in 2018 — when 30-year Treasurys were yielding about 3% — with his bonds not maturing until late 2049. That transaction was not a distortion. It was exactly the long-dated, low-risk lending that life insurers exist to perform, and the spread over Treasurys was the compensation those insurers earned for locking up capital against the income of an athlete whose career arc was, by 2018, well understood. Calling such a deal evidence of “yield starvation” reveals more about the commentator than the market.
Yields are now climbing back toward historically normal levels as central banks have held short-term rates high to subdue inflation. New Federal Reserve Chairman Kevin Warsh has said he wants the bond market’s signals to inform Fed policy, not the other way around. That deference is the heart of the problem. The bond market does not have standing to overrule democratic decisions about pensions, infrastructure, healthcare, and the cost of housing. When 30-year yields dictate the budget of every statehouse and the mortgage payment of every young family in America, “market discipline” is just a polite name for the rule of creditors over citizens — a quiet transfer of economic sovereignty from elected officials to bond desks.
The climb in yields reflects two underlying realities, neither of them benign. The first is the expectation that rates will stay elevated for years. The second is that governments will have to keep issuing enormous volumes of debt to finance entitlements for aging populations. The bond market is not rewarding this borrowing; it is rationing it, and rationing it expensively. Governments are also being forced to compete in capital markets with the AI hyper-scalers, who have the cash flows and the collateral to outbid any sovereign for long-dated dollars.
The transition will not be painless. Some market crack-ups are inevitable, and pretending otherwise would be dishonest. Washington can help cushion the blow with growth-supporting policies — which must include progressive taxation and an active industrial policy — but tax cuts and tariffs that deepen the slowdown will only make it worse.
U.S. debt held by the public has reached 100% of GDP, and on present trend it will climb further. Interest on the debt is now $1 trillion a year, more than the defense budget, and growing. Neither party is willing to reform the entitlements that drive the debt — and they will not be moved by a bond market that treats their caution as evidence of profligacy. The bond vigilantes are not yet in full cry, but their early murmurs are sending a message to Washington and other Western nations that the era of self-government through elected representatives is closing, and that credit markets now write the budget. The real worry is not that politicians will refuse to listen to the markets. It is that the markets have nothing useful to say, and are saying it loudly anyway.
