By Jonathan Levin The stunning rise in US borrowing costs has been attributed to a panoply of factors, both bad and good, including warm inflation, persistently large budget deficits and even strong economic growth, which may be boosting demand for capital. But the latest leg up in Treasury yields looks more like a credibility windfall for Federal Reserve Chair Kevin Warsh. Nestled in the details of the yield curve is a newfound market faith that the rookie Fed chair will meet the challenges of the day with the sustainably higher interest rates that the economy demands.

This is an excellent sign for those of us who worried about the independence and integrity of monetary policy, crucial to keeping consumer prices in check and the economy on a healthy growth path. Treasury Secretary Scott Bessent will see things differently. For him, the bond market’s awakening means he will struggle to keep deferring the consequences of his poor financial management. Karma will almost certainly come calling before the end of Donald Trump’s presidency if these high yields persist, spelling failure for Bessent’s efforts to avoid locking in high interest costs on America’s debt.

Let’s begin with what the data show. Sovereign bond yields have extended their global increase in the past month, across most maturities. Yet the standout move has taken place in the inflation-adjusted yields of US Treasuries that come due in between two and five years. It’s significant that the breakout began immediately after Chair Warsh delivered his most hawkish speech to-date in Jackson Hole, Wyoming, telling fellow central bankers that they “must be confident that underlying inflation is moving to our objective.” If not, they had “work to do.” The subsequent runup in real yields for short- and medium-term Treasuries has the distinct appearance of a market warming up to the idea that the Fed will lift rates meaningfully in the coming months, and keep policy tight for years to come to secure its 2% inflation goal. Breakevens — a market proxy for inflation concerns — have barely budged, weighing against the interpretation that unchecked inflation is the dominant driver. Real 2- and 5-year yields are up 0.57 percentage point and 0.64 percentage point , respectively, since Jackson Hole.

Longer-term US bonds have moved, too, but far less than shorter-maturity debt, undermining the idea that shifting growth estimates or deficit concerns are the driving force among investors. If you expect artificial intelligence to permanently boost productivity and growth, that would be reflected in yields of securities maturing in 10 years and beyond, a period long enough to cover an entire business cycle. Likewise, concerns about the government’s ability to repayits debt would be most noticeable in securities that won’t get repaid for many years.

A review of recent events further illustrates the point. The days of the Jackson Hole speech and the Fed’s Sept. 16 decision to raise rates explain about half of the move in real yields, and the rest of it stems from three macroeconomic data release days: a hotter-than-expected producer price index ; an above-consensus consumer price index; and the S&P Global flash US composite purchasing managers index. Only the last report had anything to do with growth, and it also showed that input prices grew at the fastest pace since 2022. Even when the inflation news has been alarming, the market reaction has messaged: “we can count on the Fed to snuff this out.” Other signs of strengthening Fed credibility include the dollar gaining against global currencies and gold, a hedge against dollar debasement, retreating. You’d expect the opposite reaction, along with a steeper yield curve, if fiscal unsustainability were the central impetus.

This “good news,” however, derails Bessent’s strategy for funding the US’s budget deficit. Since he took the job, the former hedge fund manager has been financing the shortfall to an unusual degree with debt maturing in less than a year, known as bills, a policy he criticized when it was carried out by his predecessor Janet Yellen; he continued it anyway. Bessent recently doubled down on this strategy by buying back existing long-dated securities, effectively financed by the shorter-term issuance.

By leaning on short-term debt, he was temporarily capping longer-term bond sales to suppress yields that influence mortgage rates and other consumer borrowing costs. The macro trader in him was apparently expecting the government would be able to issue debt for longer durations in the future when interest rates were lower.

What makes the Trump administration’s debt management downright perplexing — instead of just plain irresponsible — is that it was paired with a suite of macroeconomic policies that all but guaranteed a rise in inflation and bond yields (tariffs that drove up core goods prices and an Iran war that drove up oil).

The only rational explanation is that Trump and Bessent truly believed that Fed leadership would fall into line and hold off hiking despite the evidence, at least for long enough to make high borrowing costs the next government’s problem. It hasn’t worked out that way.

For the general public, this adjustment to higher yields won’t be painless. Higher policy rates for the medium-run will mean mortgage rates remain prohibitive, and elevated corporate borrowing costs could delay a rebound in hiring. High interest costs also mean federal budget pressures will probably get more acute in the coming years — a sad and predictable consequence of Treasury’s shortsighted stewardship. But Bessent should still move toward a policy of responsibly extending the maturity of government debt, starting next year.

It’s good to see markets signaling confidence that the Fed will make the right decisions for our long-term future; and higher bond yields may even force Congress into a much-needed rethink of its spendthrift ways.

To contact the author of this story: at jlevin20@bloomberg.net