Harvard professor and former IMF chief economist Kenneth Rogoff didn't mince words in a recent interview, saying, "We have entered the era of fiscal dominance."
The phrase may sound like academic jargon, but it captures a very real dilemma. Central banks are being pushed to keep borrowing costs low as governments pile on record levels of expensive debt.
No country embodies this problem more than the United States.
President Trump has leaned on the Federal Reserve to deliver the largest rate cut in its history just as annual interest payments on federal debt top $1.2 trillion, the second-largest federal budget line after Social Security.
The pressure has already warped the bond market.
According to the Financial Times, the gap between two-year and 30-year Treasury yields is now the widest since early 2022. Short-term yields have fallen on rate-cut bets, while long-term yields remain high.
"The U.S. debt crisis is becoming increasingly visible in the markets," wrote widely followed X commentator Global Markets Investor.
"Investors appear to be dumping U.S. assets," they added, pointing to the slump in the U.S. Dollar Index this year.
⚠️ The US debt crisis is becoming more visible in the markets:
undefined Global Markets Investor (@GlobalMktObserv) August 21, 2025
The gap between two-year and 30-year Treasury yields is near its widest since early 2022.
At the same time, the US Dollar index is near its lowest in over 3 years.
Investors appear to be dumping US assets. pic.twitter.com/LhZ3SwLNzl
A steepening yield curve doesn't always spell trouble. It can signal optimism about growth and inflation. But when long-term yields surge because investors are questioning U.S. debt sustainability, it's a red flag.
That fragility was on display in May, when the Treasury's 20-year bond auction stumbled and the 30-year yield briefly hit 5% for the first time since 2023.
By July, Loomis Sayles fixed-income manager Matthew Eagen told Morningstar the U.S. deficit is the "biggest structural risk to the bond market," likening it to the subprime crisis.
"Historically, when a government does not balance its budget — or in the case of the U.S., get it down to a more manageable level [...] then the other form of tax is inflation," he said.
He warned that deficits risk debasing both the bond market and the dollar itself, which is why gold prices are flashing warnings about fiat currencies.
Even so, Eagen sees selective opportunities. The five-year Treasury, he argues, is the sweet spot: "It's hard to lose money in a five-year instrument over a full year."
Tariff revenue: too little, too late
The Trump administration has claimed record tariff revenues are helping offset the budget hole, but critics argue otherwise.
The numbers tell the story. In July, Washington collected $29.6 billion in tariffs. Federal spending that same month hit $630 billion, leaving a $291 billion deficit.
So for now, tariffs appear to be more of a political talking point than a fiscal lifeline.
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