Governments and central banks can protect either taxpayers or bondholders from government spending shocks. When they choose to insulate taxpayers, government bond yields need to increase in response to unfunded fiscal expansions as the government debt is marked to market. The risks of unfunded spending shocks are then borne by bondholders who demand a bond risk premium. This risky debt regime is a better fit for the recent experience of the U.S. and other mature economies. We provide high-frequency evidence from the COVID episode that links U.S. Treasury yield increases to bad news about future government surpluses. In this risky debt regime, large-scale asset purchases in response to large government spending provide temporary price support to government bonds, a net loss for taxpayers.
