The recent surge in yields on long-dated U.S. Treasurys has generated concern in some circles. Jamie Dimon, the CEO of JPMorgan Chase, recently warned that the bond market is likely to crack as a result of spiraling government debt levels. “I just don’t know if it’s going to be a crisis in six months or six years, and I’m hoping that we change both the trajectory of the debt and the ability of market makers to make markets,” he said.

Others remain more sanguine and observe that interest rates have in fact normalized close to their pre-2008 global financial crisis levels. In the aftermath of the financial crisis, both real and nominal rates were stuck at unusually low levels for about a dozen years. But, since 2022, we have seen both policy and market rates edge toward their pre-crisis levels.

With interest rates reverting back to their historical norms, is the current wariness surrounding the long end of the yield curve among key investors warranted? To evaluate the validity of such fears, it is worth reviewing recent U.S. fiscal history.

During the past 45 years, the U.S. has had to deal periodically with the “twin deficits” problem — the near-synchronous widening of the fiscal deficit and the current account deficit. In the past, bipartisan policy compromises pushed through by enlightened political leadership have helped America avoid a debt/currency crisis.

In the early 1980s, the Reagan-era tax cuts contributed to a decline in U.S. government revenue that was not offset by cuts on the spending side and this led to a widening of the budget deficit.

Meanwhile, the high interest rates associated with the Paul Volcker disinflation episode led to a sharp appreciation of the U.S. dollar and contributed to a deterioration of the trade and current account balances. This simultaneous deterioration of budget and current account balances gave rise........

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