The U.S. bond market may no longer believe in fiscal fairy tales.

Moody's downgrade of the U.S. sovereign credit rating highlights a deeper issue: the long-standing fiscal optimism in the United States and the risk of sharply rising yields. While there is a global trend of forecast biases in debt, the U.S. stands out for the persistence and scale of budget deficit forecast errors. Structural factors can explain this phenomenon: the reserve currency status of the dollar, the lack of enforceable fiscal rules, and the electoral cycle that encourages short-term generous policies. Indeed, historical data shows that U.S. GDP growth has consistently outpaced borrowing costs, and some fiscal spending may still help promote economic growth. Additionally, U.S. Treasury yields are at high levels, theoretically should be attractive as a hedge in times of risk aversion. However, the actual data is not optimistic. During the period from February 19 to April 8, 2025, when the S&P 500 index fell by 19%, the 10-year bond yield only decreased by 24 basis points - much lower than the declines seen in similar periods in the early 21st century.