Why US bond yields are rising sharply despite low inflation

As President Trump alternates between hiking and suspending tariffs, the US continues to witness rising bond yields despite a decline in inflation risk index. These contradictions reveal deeper structural issues related to the spending habits of the US economy.

Steve Hanke, a professor of applied economics at Johns Hopkins University, sat down with beincrypto to explore the underlying power that drives bond yields to new heights. Economists cited the US budget deficit, tariff uncertainty and Congressional inaction as key contributors to the current economic outlook.

Why are bond yields rising?

Government bond yields have been in a fluctuating frenzy since President Trump began implementing largely volatile tariff policies after he took office. The unaddressed nature of this policy spurs uncertainty and shaking investors’ trust in the US financial system.

The numbers speak for themselves. Since April 30th, bond yields for US 10-year bonds have risen from 4.17 to 4.43. The unpredictable actions of markets, historically considered one of the world’s safest and most stable, have complimented the important alarm bells.

The reasons behind this increase may vary, but they show the fear of increasing uncertainty over geopolitical disruption and economic slowdown. While rising bond yields are usually associated with higher inflation, the latest CPI index reveals easing inflation rates, indicating that this is not the current trend.

Hanke pointed out certain factors that could explain this unusual relationship.

“Inflation has been eased over the past two years. As bond yields continue to follow inflation and inflation has declined, Ointment Fly explains that rising bond yields must be either a credit risk of sovereignty or a lack of trust in fiscal management, told Beincrypto.

The US balloon budget deficit can easily explain the validity of both scenarios.

Return of the Bond Vigilante

In the past, investors have punished the government for unsustainable spending by selling bonds, resulting in increased borrowing costs. These “vigilantes of bonds” take action in fear of economic recessions and surges in inflation, as economist Ed Yaldeni created them in the 1980s.

Combined with the current US economic context characterized by $36 trillion in national debt and $1.8 trillion in fiscal deficit, the sudden sale in the bond market following Trump’s April tariff announcement provides ample reason to predict bond vigilantes’ return.

For Hanke, the results of the recent Treasury auction show the extent of his dissatisfaction with the US financial mismanagement.

“The Treasury auction for the last month for 10 years was a disaster. We rarely saw purchases from central banks or primary dealers,” he said.

The lack of demand for US economic debt increases fear of sudden borrowing costs and signals, rather than investors worrying about the government’s ability to manage the government’s finances.

That said, Hanke said the decline in the amount circulating in the economy has more to do with him than selling bonds.

Beyond Bond Yield: Money Supply Crisis

Selling bonds suggests a rise in interest rates, but Hanke suggested that focusing on this would only make the bigger and miss out on more systematic issues. What’s even more concerning is the reduction in money supply.

Commercial banks are the largest contributors of the amounts circulating in the economy. However, the loans have been slower recently.

“Today, commercial bank credit at snail pace: 2.3% per year. That’s the fact that overall monetary growth is only 4.1%, indicating that a serious slowdown in the US economy is being baked on cakes,” Hanke told Beincrypto.

Less money flows slows the economy and makes it difficult for businesses to spend their loans and consumers. This situation is exacerbated when government spending is considered unsustainable and further erodes economic confidence, particularly when it cannot compensate for private sector lending shortages.

Some people translate this lack of trust into the erosion of US dollar control, but Hanke has abandoned the severity of these claims.

How safe is the future of the dollar?

The sustained volatility in the US Treasury market has reduced recent movements by G7 countries and their reliance on the dollar, raising concerns about long-term damage to its advantage.

According to Hanke, these are wild exaggerations.

“There have only been 14 dominant international currencies since the 7th century BC. As this timeline suggests, knocking the dominant international currency from the throne is very difficult. It’s not happening because the dollar is the cleanest and most dirty shirt around,” he said.

Instead of focusing on fluctuations in bond yields, Hanke argued that attention should be focused on addressing the underlying cause of Outtionized expenditure. In his view, this responsibility lies not with Trump, but with Congress. Congress has consistently ignored its responsibility on this issue.

Addressing chronic US spending

The United States has a long history of periods with significant government spending, often driven by war, economic recession, or social programs.

In recent decades, factors such as rising healthcare costs, eligibility programs and increased defense spending have also contributed to the extent of the US budget deficit.

Given the obvious chronicity of the issue, Hanke argues that Congress must create a dedicated committee to address mental issues.

“Congress should establish a statutory financial sustainability committee that proposes the various spending reductions and tax reforms needed to actively engage Americans and reduce GDP from debt to a reasonable and sustainable level. The committee’s recommendations should receive a guaranteed vote in Congress.

However, Hanke also admitted that Congress had historically refused to act discreetly and promptly.

Breaking the Gridlock: For constitutional remedies

Political gridlocks often create deep divisions about how to collectively address the difficult choices needed to curb federal spending, and hinder effective fiscal policy decisions.

To curb the issue, Hanke proposed a constitutional amendment that effectively imposes long-term fiscal discipline on Parliament.

“The only thing that constrains Parliament to avoid unsustainable future spending is amendments to the Constitution,” he said, “Therefore, Parliament needs to re-strengthen Parliament’s responsibilities and the rights of the state.

As the US economy continues to navigate the combined problems of bond yields, economic slowdowns and rising fiscal deficits, the current situation shows that even short-term solutions do not adequately correct the systemic problem.

The future course of the United States will depend on the current government and its members of the Congress, who must choose between decisive action and ongoing uncertainty. Their decisions will inevitably have a major impact on the future of the country.

Steve H. Hanke is a professor of applied economics at Johns Hopkins University. His latest book, Matt Sekerke, earns a way to rewrite the rules of the financial system.