The recent rise in long-term US Treasury yields has revived a familiar story about fiscal irresponsibility. Commentators point to large federal deficits, growing public debt, and the volume of Treasury securities coming onto the market. From this perspective, higher yields are the market’s response to excessive government borrowing, and the Trump administration’s policy amounts to fiscal recklessness. This interpretation rests on an old and misleading conception of financial markets. It treats government and private borrowers as competing for a limited pool of savings, so that larger deficits necessarily drive interest rates upward. But interest rates in a modern monetary economy are not determined in this way. The Federal Reserve (Fed) directly sets the short-term policy rate and strongly influences the entire yield curve through changes in the composition and size of its balance sheet and through expectations about future rates.

The current rise in long-term rates is better understood from this monetary perspective. Inflation remains above the Fed’s 2 percent target, and the energy shock associated with the Iran war has reinforced fears that inflation will persist. These fears are exaggerated. Inflation above 2 percent is not, by itself, evidence of an inflationary crisis, particularly when there is no distributive conflict capable of generating a self-sustaining wage-price spiral. The deeper problem is the Fed’s commitment to an excessively low inflation target. Because policymakers treat even moderate inflation as requiring restrictive policy, short-term rates remain unnecessarily high, and expectations of higher rates feed through to longer maturities.

Long-term yields must also be understood against the extraordinary monetary policies adopted after the global financial crisis. Quantitative easing deliberately reduced long rates by having the Fed purchase large quantities of Treasury securities. As the Fed bought long-term Treasuries, its price went up, and its yield, the long-term interest rate, went down. The subsequent retreat from those policies removed an important source of downward pressure on yields. However, the 10-year Treasury yield that appears high relative to the exceptional post-2008 period remains modest by longer historical standards. Nothing about current yields demonstrates that US public debt has become financially unsustainable. Indeed, the experience since 2008 shows that when the Federal Reserve wants to affect longer-term Treasury rates, it has the means to do so.

Adam Tooze’s recent analysis of higher bond yields provides a more sophisticated version of the bond market anxiety argument. He correctly notes that the United States is not on the verge of default. His concern is instead with the changing structure of demand for Treasuries. In the 2000s, foreign central banks absorbed a large share of new Treasury issuance. Today, he argues, private investors, especially leveraged hedge funds, play a much larger role. Because those positions can be unwound rapidly, Tooze worries that a shock could trigger forced selling and a repetition of the Treasury market turmoil of March 2020.

It is true that leveraged financial markets are fragile, and a rush for liquidity can generate disorder even in the market for the safest dollar assets. But despite this sophisticated account of the changing institutional structure of the Treasury market, Tooze still treats private demand for government securities as an operative constraint on the Treasury. The Treasury issues securities, private investors must absorb them, and the danger is that they may demand higher yields or abruptly withdraw. The Treasury therefore appears, at least to some extent, overtaken by market circumstances. That is a misconception.

The Treasury market is not an ordinary market in which the government must accept whatever price is necessary to induce private buyers to finance it. The Treasury and the Federal Reserve are formally distinct institutions, but they are symbiotically connected parts of the monetary system. The Federal Reserve banks act as fiscal agents for the Treasury. Between the Fed’s ability to set the short rate and purchase assets, including long-term bonds, and Treasury’s ability to alter the maturity composition of the debt, the public authorities ultimately have the capacity to determine the structure of Treasury rates, if they decide to use their full powers. This does not mean that financial accidents are impossible. Hedge funds can fail and markets can become temporarily illiquid. But that does not make higher Treasury yields an external constraint imposed on the US government. If disorder threatened the financial system, the Fed could intervene, as it has before. The relevant question is therefore not whether enough private buyers can be found to finance Treasury borrowing at a market-determined rate. It is why the Treasury-Fed policy regime has chosen to tolerate, and in important respects generate, substantially higher rates.

James K. Galbraith’s recent discussion of federal debt comes considerably closer to this interpretation. Galbraith dismisses the $40 trillion debt milestone as economically meaningless and emphasizes that US obligations denominated in dollars can always be paid. More importantly, he notes that high rates have different effects when federal debt is large. They do not merely squeeze housing, business investment, and consumer credit. They also generate enormous interest payments to government bondholders. As Galbraith puts it, higher interest payments “flood debt-holders with cash.” The distributive consequence is straightforward. More income goes to the wealthy bondholders. He is also right that rising long yields need not signal a loss of confidence in the government. When short rates rise and are expected to remain high, existing low-coupon long bonds fall in price and long-term yields rise. There is no need to invoke fiscal panic.

That changes how we should understand the rise in yields. The bond vigilantes are not an external market force disciplining an irresponsible government. The bond-market-panic story gets the causality backward. High rates largely reflect policy choices, and those choices have distributional consequences. For much of the period after the global financial crisis, owners of safe financial assets faced exceptionally low returns. Low policy rates and quantitative easing compressed yields, reduced interest income on government securities, and generated endless complaints about financial repression. The new regime reverses that. Once established, however, the higher-rate regime restores substantial flows of interest income to creditors and holders of financial wealth.

Scott Bessent, a man who comes from the bowels of Wall Street, is not being defeated by his old friends. Galbraith notes the irony of Bessent buying back lower-yielding long-term securities while financing those purchases by issuing higher-yielding short-term debt, and asks acidly: “Why, pray, would a public servant, supposedly not working for the bondholders, want to do that?” The question is, precisely, who benefits from the interest-rate regime that Treasury and the Fed sustain. The winners are the rentiers. Holders of Treasury securities receive larger interest payments. Financial institutions once again earn substantial returns on safe assets, and wealthy households gain a federally guaranteed stream of income. Workers, borrowers, and debtors face the other side of restrictive monetary policy. The costs are reflected in higher mortgages and credit rates, weaker aggregate demand, slower growth, and a softer labor market.

There is a further irony. The Fed raises rates, the government’s interest bill rises as a consequence, and that higher interest bill is then cited as proof that deficits are out of control and social spending must be cut. A fiscal problem partly created by the monetary regime becomes the justification for austerity. The conventional story turns the causal sequence upside down. Instead of recognizing higher interest payments as the result of a policy decision that transfers income toward creditors, it presents the resulting higher interest rate bill as evidence that government spending is out of control.

The greater danger is political, not financial. Conventional interpretations of higher yields are little more than rhetorical arguments for fiscal adjustment. Tooze is right that leveraged financial structures can unwind, and Galbraith is right that there is no meaningful federal solvency crisis and that high rates enrich bondholders. But neither financial fragility nor fiscal necessity explains the present regime. The government is not simply the victim of rates generated by the market. The Treasury-Fed system has the capacity to influence those rates and has chosen a regime in which they remain higher than in the recent past.

This is not the Volcker Shock, but there is a family resemblance. Inflation is nowhere near the 1970s levels, and unions are considerably weaker, but that has not prevented the emergence of a macroeconomic policy regime that maintains higher rates and places renewed pressure on social spending, all in the name of sound policy principles. The real issue is not the bond vigilantes but the revenge of the rentiers.