Rising US Treasury bond yields are challenging the Trump administration’s preference for lower borrowing costs, with Johns Hopkins economist Steve Hanke warning that monetary growth, fiscal pressure and political uncertainty could keep the bond market under strain.
Hanke told Fortune he expects the 10-year Treasury yield could rise by another 50 basis points and said he remains “very bearish” on bonds. His assessment comes as long-term yields move through levels that market participants have associated with Treasury Secretary Scott Bessent’s efforts to prevent borrowing costs from climbing too far.
Hanke Sees Three Forces Driving the Bond Selloff
Hanke, professor of applied economics at Johns Hopkins University and a special counselor at the Center for Financial Stability, places monetary conditions at the top of his list of concerns.
He pointed to Divisia M4, a broad measure of US money supply produced by the Center for Financial Stability, which he said is expanding at 6.7% year on year. That is above his preferred growth rate of about 6%, which he considers consistent with the Federal Reserve’s 2% inflation objective over time.
His argument is that renewed monetary expansion could keep inflation expectations elevated even if headline inflation continues to moderate. That matters to bond investors because expectations about future inflation influence the return they demand for holding longer-dated government debt.
Fiscal policy represents another source of pressure. Investors traditionally demand higher yields when they become concerned about government borrowing, inflation or the credibility of economic policy. Those investors are often described as “bond vigilantes”, a term economist Ed Yardeni introduced in the 1980s to describe markets imposing discipline on policymakers through government debt sales.
Hanke believes those investors have returned and are increasingly willing to challenge Washington.
Fortune also reported that the US and Japan conducted a coordinated yen-buying operation on July 31, when the 30-year Treasury yield reached 5.27%. According to the report, policymakers were concerned that further yen weakness could encourage Japan to reduce some of its substantial US Treasury holdings while supporting its currency.
Bessent’s Yield Threshold Comes Under Pressure
The market move creates a difficult backdrop for Treasury Secretary Scott Bessent. He has previously expressed a preference for a 10-year yield with a “3 handle”, meaning below 4%, while Fortune cited market perceptions of roughly 4.5% on the 10-year and 5% on the 30-year as important informal thresholds.
Those levels matter far beyond Treasury trading desks. The 10-year Treasury yield acts as an important benchmark across US finance, influencing borrowing conditions for mortgages, companies and other forms of credit. Persistently higher long-term rates can therefore tighten financial conditions even without another Federal Reserve rate increase.
That transmission mechanism also creates a potential problem for equity valuations. When investors can earn higher returns from government securities, the relative attraction of riskier assets changes. Higher discount rates can also reduce the present value investors assign to companies whose valuations depend heavily on earnings expected far into the future.
That is particularly relevant after strong investor enthusiasm for artificial intelligence helped support equity valuations. Hanke described the stock market as driven partly by “AI hype” and argued that equities have not yet reflected the risks visible in bonds.
The implication is that the bond market does not need the Federal Reserve to tighten policy formally to influence other assets. If long-term yields remain elevated, financing becomes more expensive and valuation assumptions face greater scrutiny. A sustained move higher could therefore perform some of the tightening normally associated with central bank action.
Oil and the Dollar Add to Hanke’s Wider Market Warning
Hanke also sees risks outside fixed income. He argued that crude oil prices are not fully reflecting tight inventories and expects oil to strengthen over the coming months, citing reduced refining capacity linked to disruption in Russia and the Middle East.
On the dollar, however, his outlook is considerably less pessimistic. Hanke rejected the idea that the US is heading towards a sovereign default and remains confident in the dollar’s international role. He acknowledged that tariffs and sanctions can weaken confidence in the currency but argued that talk of sustained de-dollarisation overstates the scale of the shift.
Long-Term Rates Are the Signal to Watch
The central question is now whether higher Treasury bond yields remain contained within fixed-income markets or begin exerting greater pressure on stocks, property and corporate borrowing.
Hanke’s warning does not establish when, or whether, an equity correction will occur. He acknowledged that the timing of market bubbles is exceptionally difficult to predict. The more immediate signal is the direction of long-term rates.
If the 10-year and 30-year yields continue climbing, investors will have to reassess how much risk they are prepared to hold and at what price. That would turn the bond market’s current warning into a broader test of US financial conditions and the Trump administration’s economic agenda.
