The United States Treasury may be able to influence bond markets in the short term, but economist Steve Hanke argues it cannot override the underlying forces driving borrowing costs higher. With U.S. federal debt now above $40 trillion, Hanke says the real problem is no longer simply the size of America's debt — it is the mounting cost of servicing it
INR Report: Based on an interview with economist Dr Steve Hanke by Lena Petrova for World Affairs In Context, published 26 August 2026. Watch the original interview.
Hanke's argument begins with what the U.S. Treasury is attempting to achieve in the bond market.
According to the interview, Treasury is increasing purchases of longer-dated government securities while continuing to issue enormous quantities of new debt. Hanke describes the strategy as an attempt to control the long end of the yield curve — particularly 10-year and 30-year Treasury yields.
His description is unusually direct:
"They're trying to manipulate the market."
The objective is straightforward. Buying longer-term bonds increases demand for them, potentially lifting their prices and lowering their yields. Meanwhile, more of the government's financing requirements can be shifted towards shorter-duration Treasury securities.
It is broadly the logic behind what has historically been called Operation Twist — altering the maturity composition of government securities in an effort to influence different parts of the yield curve.
But Hanke believes the underlying economic conditions are working against it.
Why the 10-Year Treasury Matters
The significance of the 10-year Treasury extends far beyond investors buying U.S. government debt.
Hanke notes that numerous borrowing costs throughout the American economy are influenced by longer-term Treasury yields, including mortgage and other lending rates. That gives Washington an obvious political and economic incentive to prevent those yields climbing sharply.
But manipulating the maturity of Treasury issuance does not eliminate the government's financing requirement.
Washington still has to fund its deficit.
If Treasury buys longer-duration bonds while issuing additional short-term debt, it may alter where pressure appears along the yield curve, but it does not make the underlying borrowing requirement disappear.
And this is where Hanke believes the strategy encounters a much larger problem.
Money Supply Is Moving the Wrong Way
Hanke argues that attempts to restrain longer-term yields would have a better chance of succeeding if monetary conditions were moving in the same direction.
In his assessment, they aren't.
He cites Divisia M4 — a broad measure of U.S. money supply — as growing at approximately 6.7% year-on-year, with shorter annualised measures growing even faster.
For Hanke, a monetarist, that matters enormously.
His argument is that excessive money-supply growth eventually feeds into inflation, while expectations of higher inflation feed into higher bond yields. Consequently, attempting to hold long-term yields down while monetary growth is accelerating means policy is pulling in opposite directions.
He expects that pressure to eventually reach households.
Higher Treasury yields can translate into higher mortgage rates and weaker housing activity. Hanke notes that the American housing market is already struggling under borrowing costs considerably above the ultra-low rates experienced before the recent inflation cycle.
The AI Boom Is Competing With Washington for Capital
There is another pressure Hanke believes deserves considerably more attention: artificial intelligence.
The extraordinary construction of data centres and computing infrastructure requires enormous capital expenditure.
Even highly profitable technology companies cannot necessarily finance the entire build-out from operating cash flow. Hanke points to companies such as Google and Meta as examples of corporations entering credit markets to help fund huge AI infrastructure programmes.
That means the U.S. government is not borrowing in isolation.
It is competing for capital against some of the world's largest corporations during one of the biggest technology investment cycles in decades.
When demand for borrowed capital rises, the price of that capital — the interest rate — tends to rise with it.
The Bond Vigilantes Are Back
Hanke describes another force entering the equation: the return of the "bond vigilantes."
The term refers to investors who punish governments they believe are pursuing irresponsible fiscal or monetary policies by selling bonds or demanding higher yields before purchasing them.
Hanke argues investors are increasingly concerned about America's fiscal deficits, rising money supply and broader policy uncertainty.
His conclusion is that Treasury's attempts at yield-curve control will ultimately collide with those fundamentals.
If investors expect persistent inflation or increasing fiscal risk, they will demand greater compensation for lending money to Washington.
Hanke says that is already happening:
"The bond vigilantes have come out of hibernation."
He believes their conclusion is essentially the same as his: Treasury cannot sustainably impose a ceiling on longer-term yields while the monetary and fiscal environment is pushing those yields upwards.
This Isn't Only an American Problem
The pressure is also appearing beyond the United States.
Hanke points to rising longer-term yields in Japan and Europe, arguing that large fiscal deficits create a common underlying problem.
Governments running large deficits must issue more bonds.
More bonds mean greater supply.
Unless demand rises sufficiently to absorb that supply at existing prices, bond prices fall and yields rise.
Japan is particularly important to the United States because Japanese investors have historically been major holders of U.S. Treasuries.
If Japanese government bond yields become sufficiently attractive, Japanese investors have greater incentive to keep capital at home rather than purchasing American debt.
Hanke acknowledges this as another potential source of upward pressure on U.S. Treasury yields.
Confidence May Be the Bigger Problem
One of Hanke's strongest warnings concerns something harder to measure than money supply or government debt.
Confidence.
Markets can tolerate enormous quantities of debt if investors believe the institutions managing that debt remain predictable and credible.
But Hanke argues intervention itself can become destabilising if investors begin wondering what policymakers will do next.
He believes Treasury Secretary Scott Bessent's announcement of bond buybacks risks producing exactly that effect.
Hanke stops short of describing the market as being in chaos. Instead, he says Treasury's intervention has "unsettled the market."
His broader point is important.
Markets price securities according to supply and demand, but those calculations also incorporate risk. When investors become uncertain about policy, the return they demand for holding government debt can increase.
Is the World Abandoning the Dollar?
Hanke is considerably more cautious about claims that the dollar is rapidly losing its global position.
Central banks have been increasing gold's share of reserves, he says, while the dollar's reserve share has declined somewhat.
But he rejects sweeping claims that the world economy is rapidly "de-dollarising."
Looking across the dollar's broader role — including reserves, international transactions and financial markets — Hanke says its overall usage remains enormous and has even increased proportionately across some measures.
China's renminbi has increased its international role, but from such a small starting point that Hanke considers its absolute position comparatively modest.
His distinction is therefore important.
The dollar is not suddenly disappearing.
But U.S. policy can still make it less attractive at the margin, gradually encouraging governments and investors to diversify.
The $40 Trillion Problem
The most consequential part of the interview concerns America's federal debt.
With U.S. national debt having crossed $40 trillion, Hanke argues the burden is already affecting federal finances because the debt must continually be serviced.
And his figure for that burden is striking.
Hanke says approximately 35% of U.S. personal income-tax revenue is currently required simply to pay interest on federal debt.
He further says Congressional Budget Office projections indicate that, if current fiscal trends continue, that proportion could eventually reach 50%.
If that occurs, half of personal income-tax revenue would effectively be consumed servicing previous borrowing before government provides current services from that revenue.
That is why, in Hanke's interpretation, Washington is so concerned about long-term interest rates.
The larger the debt becomes, the more damaging every increase in the government's average borrowing cost becomes.
Can the Federal Reserve Rescue Treasury?
There is an obvious theoretical escape route.
The Federal Reserve could become a much larger buyer of Treasury securities.
America has done something similar before.
Hanke points to 2020, when the Federal Reserve dramatically expanded its balance sheet and purchased enormous quantities of government securities as Washington financed pandemic-era deficits.
But he connects that monetary expansion directly with the subsequent surge in inflation, which eventually reached 9.1%.
For that reason, Hanke doubts the Federal Reserve would willingly repeat the exercise on the same scale.
He also stresses that Treasury cannot simply order the Federal Reserve to monetise government borrowing because the central bank remains institutionally independent.
This creates a fundamental constraint.
Treasury wants lower borrowing costs.
But if achieving them requires monetary expansion that reignites inflation, bond investors may simply demand higher yields again.
Hanke's Solution Is Constitutional
Asked what could genuinely resolve America's debt problem, Hanke does not propose another temporary fiscal programme.
He argues the political system itself has demonstrated that ordinary statutory controls are insufficient.
His proposed solution is an Article V constitutional convention, narrowly focused on introducing a constitutional debt brake that would restrict the federal government's ability to continue running persistent deficits.
Whether such a proposal could realistically win sufficient political support is another question.
But Hanke's diagnosis is unequivocal: after decades of deficits under governments of both parties, he does not believe Washington will voluntarily impose lasting fiscal discipline on itself through ordinary legislation.
Does This Affect New Zealand?
Yes — although the transmission is indirect.
New Zealand is a small, capital-importing economy operating inside a financial system heavily influenced by global interest rates and the U.S. dollar.
If U.S. Treasury yields remain structurally higher, international investors can earn greater returns from what has traditionally been regarded as one of the world's benchmark low-risk assets. Other borrowers — including governments, banks and companies in smaller economies — may therefore have to offer competitive returns to attract capital.
That can place upward pressure on wholesale funding costs internationally and complicate the environment in which New Zealand interest rates are determined.
There is also a currency dimension.
Periods of international financial stress can produce substantial movements in the U.S. dollar and consequently the NZ dollar. For an economy dependent on imported fuel, machinery, vehicles, electronics and other goods, exchange-rate movements ultimately reach household and business costs.
But the larger lesson for New Zealand may be fiscal.
America demonstrates what happens when accumulated government debt meets persistently higher interest rates: an increasing proportion of tax revenue must be devoted simply to servicing yesterday's spending.
Debt does not become dangerous merely because a particular numerical threshold has been crossed.
The danger emerges when the cost of carrying that debt begins restricting what governments can do today.
And that is the real warning contained in Hanke's argument.
Washington may be able to buy bonds, alter maturities and attempt to influence the yield curve.
But ultimately it still has to persuade somebody to finance the debt.
And the bond market gets to decide the price.
Source: World Affairs In Context — Lena Petrova interview with Dr Steve Hanke, Steve Hanke Warns: U.S. Treasury Can’t Stop the Bond Market From Exploding, 26 August 2026. Watch the original interview.
Independent reporting. Original context. Credited sources.