In the four decades since economists Tom Sargent and Neil Wallace outlined their influential framework on monetary and fiscal dominance, the status of U.S. Treasury securities is undergoing a significant shift. What once functioned as nearly equivalent to money is increasingly being treated simply as debt instruments, reflecting changes in market dynamics and government borrowing.

Sargent and Wallace’s 1981 analysis described two key scenarios affecting government finance and monetary policy. Under monetary dominance, the government’s borrowing is limited by public demand for its debt; when demand wanes, interest rates rise, discouraging further borrowing and allowing the central bank to control inflation through debt market operations. Under fiscal dominance, however, the government can borrow unrestrictedly, forcing the central bank to either finance this borrowing, risking inflation, or to let markets enforce borrowing constraints, potentially destabilizing financial assets.

Since the early 1980s, the United States has largely operated under fiscal dominance, yet with minimal borrowing costs. This unusual situation enabled government debt—U.S. Treasuries—to serve dual roles as both tradable securities and near-risk-free money-like instruments with highly liquid markets. Treasuries were colloquially referred to as “cash” by traders due to their unique combination of liquidity and safety, a condition economists describe as “moneyness.”

Historically, the classification of government debt and currency was more distinct. Following the U.S. Constitution, the federal government issued debt as securities, via bonds sold to investors in exchange for currency, a system established under Alexander Hamilton. While earlier periods—such as colonial times, the Civil War, and financial crises—saw episodes where governments issued liquid currency-like obligations beyond traditional bonds, these were exceptions rather than the rule. Over time, the American financial system returned to treating federal debt primarily as bonds rather than money.

However, recent market developments indicate that U.S. Treasuries may be losing some of their money-like qualities. The yield on the 10-year Treasury note recently rose to approximately 5.25 percent, a level that surprised many given the traditional stability and low yields associated with these securities. While broader factors such as rising global government bond yields, sustained U.S. budget deficits, inflationary pressures fueled by geopolitical conflicts, and private sector borrowing needs play significant roles, these do not fully explain the sharp rise in Treasury yields.

The gradual erosion of the “moneyness” of U.S. government debt suggests that market tolerance for instantaneous government borrowing without penalty is diminishing. Consequently, Treasuries are appearing increasingly as conventional bonds rather than special monetary instruments. This shift implies tighter constraints on government fiscal policy and potential challenges for the Federal Reserve in managing inflation without adverse market reactions.

As Sargent and Wallace’s framework forewarned, when fiscal dominance prevails and demand for sovereign debt wanes, inflationary pressures can intensify, and policymakers face difficult trade-offs. The unique status that U.S. Treasuries enjoyed for decades appears to be waning, signaling a potential turning point for monetary and fiscal dynamics in the United States.