Can America’s bond market keep defying the vigilantes?

A year into Donald Trump’s second term, investors have no shortage of reasons to flee American assets. They must contend with blockbuster deficits, attacks on the Federal Reserve, trade wars—and most recently an obsession with annexing Greenland that at one point looked as if it might blow up NATO. Occasionally, confidence has wavered. It has lately done so again, as the Greenland furore collided with a blow-up in Japanese government bonds , knocking up yields on Treasuries.

Scott Bessent, the treasury secretary, has tried to pin the blame entirely on shockwaves from Japan that have hit government bonds across the world. True, yields elsewhere have also jumped in recent days. Yet chaos abroad would usually boost the dollar, seen by investors as a safe haven. This time the dollar has weakened amid the turbulence, which suggests there are also problems closer to home.

Past scares have been short-lived, though, and this time the damage is still small. Yields on ten-year Treasuries are only two hundredths of a percentage point above their level on January 16th. What is more, those yields are well below where they were when Mr Trump was inaugurated a year ago—and have declined by more since then than those for any of America’s peers (see top chart). In other words, despite the president’s antics, the bond vigilantes have largely spared him.

Other measures paint a similarly rosy picture. The premium investors demand to hold Treasuries, rather than buying other government bonds and swapping their proceeds into dollars, is within historical norms. In fact it has actually narrowed in recent months, calculates Robin Brooks of the Brookings Institution, a think-tank (see bottom chart). In the middle of last year the dollar looked weaker than might have been expected based on short-term factors such as cross-country differences in interest rates. Now it is back in line with what macroeconomic models would predict, reckons Steven Kamin of the American Enterprise Institute, another think-tank (see chart 3).

What is going on? One answer is that for all of America’s fiscal sins, it looks chaste enough compared with the rest of the rich world. Japan is burdened by colossal debts. France is suffering a slow-burning fiscal crisis. Britain remains stuck in a low-growth, high-tax funk. Uncle Sam may be indebted up to his ears, but at least the American economy is still growing and its demography looks less dire than in other rich places. Its sheer scale, and the dollar’s unique position in the global financial system, are additional virtues. And hand-wringing over America’s deficits is hardly new. Giving in to such worries has historically been a good way to lose money.

Another possibility is less cheery. Bonds do well when growth falls and markets price in lower interest rates. This makes the higher coupons locked in for existing bonds look more attractive. And American growth, though solid, has slowed—especially relative to what it might have been had Mr Trump not pursued anti-growth policies such as tariffs and mass deportations. This explanation will be tested if growth accelerates in 2026 as Mr Trump’s tax cuts take full effect.

Or perhaps the market is getting things wrong. Traders are accustomed to dealing with small changes in growth and inflation. The impact of Mr Trump’s radical ideas, about tariffs, immigration, the Fed’s independence and much else, is harder to price in. When inflation surged in 2021-22 for the first time in 40 years markets were slow to twig that the Fed would have to ratchet up interest rates. The risk is that once investors do change their minds, their new beliefs will be hard to budge. ■