Speaking on a plenary panel, Sloan Distinguished Professor of Finance and GCFP Director Deborah Lucas offered her views on “US Treasury Debt and Fiscal Sustainability” at the Society for Financial Studies Cavalcade conference in Charlottesville, VA on May 20, 2026.
Lucas argued that while U.S. fiscal policy is clearly on an unsustainable path, it is reasonable for Treasury bond investors to presume their holdings are nominally safe, at least in the short run, because either the Fed would intervene to buy debt in a failed auction or the government would find money elsewhere to honor its debt commitments. The important fundamental economic questions are whether there is the political will to change the fiscal path in the absence of an investor run on the debt? And how much will citizens suffer from the reduction in government services if a breaking point is reached? Lucas pointed to the need for academics to move away from a safe versus risky dichotomy in thinking about Treasury debt.
To realistically study fiscal pressures and the effects on the bond market, she argued that economists need to move to non-stationary and probabilistic frameworks where sustainability is defined in terms of thresholds for the likelihood and severity of adverse outcomes, abandoning outdated approaches that focus on deterministic interest rates and economic growth rates. She concluded with her most optimistic scenario for how the situation might play out, which would involve a short-lived episode of panic selling and a spike in Treasury rates that generates the political will to make real fiscal changes.
Lucas was joined on the panel by Andrew Abel (Wharton), Zhengyang Jiang (Kellogg), Michael Faulkender (University of Maryland) and Joshua Rauh (Stanford).
