If the name Liz Truss sounds vaguely familiar, there’s a reason for that. Truss was once the prime minister of the U.K.—but for just 45 days.

How did Truss lose public confidence so quickly? In short, the bond market forced her out. Shortly after taking office in the fall of 2022, Truss proposed substantial tax cuts both for corporations and for individuals. That would have been a popular move, except that her budget didn’t include any offsetting cuts to spending. That spooked investors worried about Britain’s debt load, and markets responded immediately: 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. Indeed, a school of thought known as 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. At least since ancient Rome, it’s been understood that deficits do eventually matter. But Truss’s story isn’t well known in the United States. The reason for that, I think, is because we tend to view ourselves as being in a different category economically. Because of the size of the U.S. economy, there’s been the perception that our resources are almost limitless and that the sort of crisis that hit the U.K. is the kind of thing that only happens elsewhere.

But since public spending ballooned during the pandemic, this seemingly impermeable facade has begun to show cracks. Where budget deficits used to be measured in billions, they’re now in the trillions. The federal government today spends about $7 trillion a year while only collecting about $5 trillion in revenue. And Congress is debating a new tax bill that would add to the annual shortfall.

Nonetheless, it came as somewhat of a surprise last Friday afternoon, when Moody’s, a rating agency, announced that it would be downgrading U.S. Treasury bonds, stripping them of their triple-A status.

Moody’s laid the blame for its decision on both political parties and on both ends of Pennsylvania Avenue. The downgrade, they wrote, “reflects the increase over more than a decade in government debt and interest payment ratios…”

Moody’s continued: “Successive US 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, though, Moody’s action was a lagging indicator. As one Bloomberg headline put it: “Moody’s Tells Us What We Already Know About US Debt.”

There’s been concern, in fact, 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, and in 2023, Fitch, another rating agency, took away its own triple-A rating. Thus, concern has been building, but it seems to have now reached a tipping point. While not as severe, the dynamic that hit Liz Truss’s government has now 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. And yet, market rates have gone up, not down. While the Fed has dropped 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 breached 5%.

Normally, market rates 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. That’s 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 might seem arcane, the bond market is worth watching.

2. Whether to lose sleep. Some commentators are asking whether the Trump administration might try to “renegotiate” government bonds as a way to cut our 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 see it as highly unlikely. That’s because economic history has shown that borrowers who default have a very hard time ever borrowing again. So, despite the concerns about the federal budget—which are justified—I don’t believe investors should truly lose sleep over Treasury bonds.

3. Investors’ best defense. While I don’t worry about the long-term viability of Treasury bonds, it definitely isn’t an easy situation. My guess is that the unblemished track record of Treasury securities will continue, but nothing is truly guaranteed. And wrangling in Congress could cause disruptions in the short term. For that reason, it’s worth recalling 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. 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 at this time. Moving some cash into a CD or a high-yield savings account—within FDIC limits—could also help spread the risk.

4. Keeping risk in perspective. While the numbers Moody’s cites are concerning, it’s worth keeping current events in perspective. On the Moody’s rating scale, there are 21 levels. While U.S. Treasurys have been moved down one notch, they’re still very close to the top. What Moody’s is saying is that U.S. Treasury bonds, which used to carry virtually no risk, now carry some very tiny level of risk. For that reason, as the old saying goes, I’d be wary of going from the frying pan to the fire. Steer clear of financial salespeople hawking alternatives, such as cryptocurrency, commodities or private debt funds, which may carry far more risk.​