Stanley F. Druckenmiller is a legendary investor and was the mentor of both Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent.
Let the Bond Market Speak
Rising interest rates are a signal of trouble ahead. Artificially suppressing it heightens the danger.
By Stanley F. Druckenmiller, The Wall Street Journal,
Aug. 24, 2026
…
Unemployment is 4.1%, full employment by any definition. The deficit is running near 6% of gross domestic product, a number America has never before produced in peacetime at full employment. The national debt crossed $40 trillion the same week Treasury intervened. Net interest will exceed $1.1 trillion this fiscal year, more than the defense budget. The 10-year yield, even after the summer selloff, sits at or below the economy’s nominal growth rate. That means a borrower (federal government) running 6% deficits at full employment, with above-target inflation, still funds itself at roughly the rate its economy grows.
Historically, that configuration is accommodative, not restrictive, of financial conditions. …
Buying back long bonds while funding the purchases with bills shifts duration, or long-term interest-rate risk, out of public hands—economically, a small dose of quantitative easing run out of the Treasury rather than the Fed, easing financial conditions while inflation sits above target. These enlarged operations happen to run through the final stretch of a midterm campaign. Debt management that even appears to follow the political calendar spends the one asset that took two centuries to accumulate: the credibility of the Treasury market. That asset doesn’t regain its value so easily…
Term out the debt honestly and pay the price the market sets. If the 30-year must trade at 5.5% to clear, that isn’t a crisis. It is an invoice. Then do the only thing that durably lowers long-term yields: address the primary deficit. Reform entitlements gradually and honestly, through means testing, indexing changes, eligibility adjustments phased in over decades—so that the burden is shared across generations instead of dumped on the youngest. …
Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak. [end quote]
I agree with this. The bond market needs to be free to set rates without meddling by the government, either the Federal Reserve or the Treasury.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows that financial conditions are extremely loose and getting looser. Monetary conditions are stimulative.
Governments on all levels will run into a disaster if they continue increasing deficits. Will politicians address the primary deficit by raising taxes and reducing spending?
I will be the most surprised woman in the room if they do. The political penalty would immediate and targeted while the political benefit would be long-term and diffuse.
The growing deficit will cause inflation. That will cause rising Treasury yields.
Wendy