Nobel winner Joseph Stiglitz has a warning for bond investors

U.S. long-term borrowing costs came under pressure this week — but the bond market may still not be fully factoring in the fiscal challenge facing the world’s biggest economy, according to Nobel-winning economist Joseph Stiglitz.

“I think we’ll be able to finance the U.S. government,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti forum in Italy. He nevertheless added that a “real indicator of the market not thinking things are being well managed” was reflected in a calculation of real interest rates projected forward 10 years, which has risen from 2% to around 2.5%.

“Let me tell you, I agree with that perspective, and I think markets are slow to react,” Stiglitz said.

“They haven’t fully taken on board, for instance, [U.S. President Donald] Trump’s claim that tariff revenues are going to finance the deficit. What [he] doesn’t understand is it takes a while for firms to readjust their supply chains, and so, in the short run, you have your old supply chain, and you pay your tariffs at the high rate.”

“But, you know, it’s like gravity. Firms are going to find the way they can [to] import goods at the lowest tariff, and as soon as that happens, tariffs go down,” Stiglitz continued.

“So I think the U.S. financial position will be worse than these straightforward projections we see for the moment, [with] tariff revenue quite high.”