Appears on HumbleDollar

Adam M. Grossman  |  May 24, 2025

IF THE NAME LIZ TRUSS sounds vaguely familiar, there’s a reason: Truss was once the prime minister of the U.K.—but for just 45 days.

How did Truss lose public confidence so quickly? The bond market forced her out. Shortly after taking office in the fall of 2022, Truss proposed substantial tax cuts for both corporations and individuals. That would have been a popular move, except that her budget didn’t include any offsetting spending cuts.

This spooked investors who worried about Britain’s debt load. Markets immediately responded: The pound sank to a 37-year low, and bond yields jumped more than 1.5 percentage points in the space of a few days. With that, Truss was out.

There’s the notion that governments can never actually run out of money, because they have the power of the printing press. Modern Monetary Theory argues that deficits don’t matter—that large economies like the U.S. and the U.K. can, more or less, spend freely.

Liz Truss’s experience is a testament to the fallacy of that theory. As early as ancient Rome, there’s been evidence that deficits eventually do matter. But Truss’s story isn’t well known in the U.S. Why? I believe the reason is that we tend to view ourselves in a different economic category. Because the U.S. economy is so large, there’s the perception that we have limitless resources and the crisis that hit the U.K. is a crisis that would only happen elsewhere.

Since public spending ballooned during the pandemic, this seemingly impermeable facade has begun to show cracks. Budget deficits that used to be measured in billions are now in the trillions. Today’s federal government spends approximately $7 trillion a year and collects only about $5 trillion in revenue. Congress is now debating a new tax bill that would add to the annual shortfall.

Nonetheless, there was a surprise eight days ago when the rating agency Moody’s announced it would downgrade U.S. Treasury bonds, stripping them of their triple-A status.

Moody’s blamed this decision on both political parties and on both ends of Pennsylvania Avenue. The downgrade, the rating agency wrote, “reflects the increase over more than a decade in government debt and interest payment ratios….”

Moody’s continued: “Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs…. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.”

Unless changes are made, Moody’s wrote, “federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021.”

These numbers are certainly alarming, and there’s no easy way to explain them away. To some degree, Moody’s action was indeed a lagging indicator. As one Bloomberg headline put it: “Moody’s Tells Us What We Already Know About U.S. Debt.”

There’s been concern for more than a decade over lawmakers’ ability to manage the budget responsibly. Back in 2011, Standard & Poor’s was the first to downgrade U.S. Treasury debt. In 2023, Fitch, another rating agency, took away its own triple-A rating. Concern has been building, and it now seems to have reached a tipping point. While not as severe as that which hit Liz Truss’s government, the dynamic has hit the radar here. We can see that in the trajectory of interest rates.

Late last year, the Federal Reserve lowered its benchmark federal funds rate three times. Yet rates on longer-term debt—which are determined by the market—have gone up, not down. While the Fed has dropped short-term rates by a total of one percentage point, from 5.5% to 4.5%, market rates have risen by a percentage point. Last fall, the yield on the 30-year Treasury bond was around 4%. This week, after the Moody’s announcement, it reached 5%.

Market rates typically follow the Fed’s lead. But in this case, investors are communicating—in no uncertain terms—their worries about fiscal mismanagement in Washington and, by extension, the riskiness of federal debt. Investors are no longer willing to buy bonds at the same low rates as before.

What does this mean, and how concerned should we be? While there are no clear answers, we can make several observations:

1. The importance of bond yields. Compared to the stock market, the bond market might seem dull. But its importance to public policy is far more significant because of the direct connection between bond rates and the federal budget. Today, the federal government’s outstanding debt totals about $36 trillion. If it were forced to pay even 1% more to nervous lenders, it would bump up federal spending by another $360 billion a year. For that reason, while it seems somewhat arcane, the bond market is worth watching.

2. Whether to lose sleep. Some commentators ask whether the Trump administration might try to “renegotiate” government bonds as a way to cut the nation’s debt load—in other words, to pay bondholders less than 100 cents on the dollar. While the president has alluded to this idea before, I believe it’s unlikely because economic history has shown that borrowers who default have a very hard time borrowing again. Despite the concerns about the federal budget—which are justified—I don’t believe investors should lose sleep over Treasury bonds.

3. Investors’ best defense. I don’t worry about the long-term viability of Treasury bonds. Still, it isn’t an easy situation. Wrangling in Congress could cause disruptions in the short term. My advice: Keep in mind what economist Harry Markowitz called “the only free lunch” in investing: diversification. Because it doesn’t cost anything, it’s worth reviewing your bond portfolio to see if any changes might be in order.

If you want to manage risk, you might include a mix of individual Treasury bonds of various maturities, along with positions in Treasury bond funds. Without adding too much more risk, you might also consider a short-term municipal bond fund. While municipalities do depend in part on the federal government, they’re largely independent, and that could make highly-rated municipal bonds a reasonable choice. Moving some cash into a certificate of deposit or a high-yield savings account—within FDIC limits—could also help spread the risk.

4. Keep risk in perspective. There are 21 levels on Moody’s rating scale. Although U.S. Treasurys have been moved down one notch, they’re still very close to the top. Moody’s message: U.S. Treasury bonds used to carry virtually no risk, but now they carry a very tiny level of risk. For that reason, as the old saying goes, I’d be wary of going from the frying pan into the fire. Steer clear of financial salespeople hawking alternatives, such as cryptocurrency, commodities or private debt funds, which may carry far more risk.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideasemail, follow him on X @AdamMGrossman and check out his