Top economist on Trump’s ‘deadly cocktail’ for the bond market—and how the bond vigilantes have crossed Scott Bessent’s ‘red line’

The bond market is the only major asset class currently pricing risk correctly, according to Johns Hopkins economist Steve Hanke—and what it’s pricing in is ugly.

In an interview with Fortune , Hanke argued that President Trump has inadvertently mixed what he called “a deadly cocktail” for Treasuries, and the result is a bond selloff that has already pushed yields past the informal threshold Treasury Secretary Scott Bessent has been trying to defend.

“It’s a deadly cocktail,” Hanke offered.

He said “the bond vigilantes have come out of hibernation” in reference to the investors that have served as the scourge of administrations for decades, selling government debt en masse to punish what they see as reckless fiscal or monetary policy, ultimately driving yields higher until policymakers change course.

The term was coined by economist Ed Yardeni in a 1983 paper, where he wrote that if fiscal and monetary authorities wouldn’t regulate the economy, “the bond investors will.” James Carville, Bill Clinton’s chief political strategist, gave the idea a famous endorsement a decade later, saying he wanted to be reincarnated as the bond market: “You can intimidate everybody.” Hanke said he expects the 10-year yield could climb another 50 basis points, adding that he will be “very bearish” on bonds, “for quite some time.” Three ingredients in the cocktail Hanke, a professor of applied economics at Johns Hopkins and a special counselor at the Center for Financial Stability, as well as a Fortune senior contributing columnist, laid out the selloff as the product of three distinct forces, ranked in order of importance.

The first and most important, he said, is monetary.

“The first thing is always money.” Hanke pointed to Divisia M4—the broadest and, in his view, most reliable measure of the money supply, produced by the Center for Financial Stability and tracked by monetary economist William Barnett.

This is growing at 6.7% year-over-year, above what his own “Golden Growth Rate” of roughly 6%, the pace he sees as consistent with the Fed’s 2% inflation target.

That acceleration follows what Hanke calls the “bathtub” dynamic —a framework he has explained in previous Fortune interviews, likening the supply of money to water into an already full bathtub.

The massive pandemic-era liquidity bubble has largely drained out of the financial system, he said, and the tub is now refilling.

“It’s going to be a long time until inflation is at 2%,” he said, referring to the Federal Reserve’s target rate of inflation, and he argued that inflation expectations—not just realized inflation—are what drive bond yields, and those expectations are being fed by faster money growth.

“The inflation genie’s out of the bottle, and it’s not going back in,” he said.