Bill Clinton’s campaign manager, James Carville famously mused that he would like to be reincarnated as the bond market – so that he could intimidate everyone. Seventeen years on, the market has lost none of its power to reduce all and sundry to a quivering wreck. The beginning of the week saw the biggest sell-off in US Treasuries for two years.

Although dramatic, this week’s events are not a reason to panic: after three disinflationary decades, yields are still low by historical standards. While there are gloomy explanations for the market moves, there are also benign ones. Vaulting yields could mean investors fear rising inflation or share concerns about the sustainability of Washington’s fiscal position. They might equally reflect expectations of higher economic growth.

The inflationary explanation is the least plausible. Private demand remains weak, and US house prices are still falling. Deflation seems as reasonable a concern as inflation. Moreover, it was not just conventional bonds that were sold off this week. Yields on index-linked bonds also rose sharply. If inflation were investors’ only worry, they would have had no reason to sell these securities.

This leaves growth or the US deficit. Yields were rising before President Obama’s deal to extend the Bush era tax cuts. But the sharpest spike coincided with the plan’s announcement. The deal certainly gives bondholders with an eye on the US deficit something to think about. Its combination of tax cuts, a payroll holiday and an extension of benefits for the jobless will add about $900bn to the federal government’s debts over the next two years.

However, the plan is also a shot in the arm for the US economy. It is bigger that the 2009 stimulus package. In conjunction with other recent developments, it may give cause for cautious optimism. Leading indicators, such as construction spending, have improved of late and stocks are trading at close to two-year highs. True, unemployment remains stubbornly high. But growth tends to precede employment, rather than the other way around.

It is not clear which aspect of the plan is uppermost in the market’s mind. But in any case, for the federal government, the implication is the same. It needs a credible medium-term plan to cut its deficit. If growth sets in, then the government will be able to rein in stimulus measures without unduly slowing the economy. If, on the other hand, self-reinforcing fears about the US’s long-term solvency are beginning to take hold, the case for fiscal tightening is stronger still.

US leaders should do all they can to make sure it is the former rather than the latter. Voting on the Bowles-Simpson deficit reduction plan would be a good start.