This paper studies the interaction between fiscal policy and bondholders against the backdrop of high sovereign debt levels. For our analysis, we investigate the case of Italy, a country that has dealt with high public debt levels for a long time. We derive an external instrument for bond demand shocks from a novel news ticker data set to address the empirical challenge of pinning down political uncertainty and investors’ forward-looking behavior. We further derive a fiscal rule and a bond demand schedule from theory and incorporate them alongside the instrument in a Bayesian structural VAR model. Our main results are threefold. First, the interaction between fiscal policy and bondholders’ expectations is critical for the evolution of prices. Fiscal policy reinforces contractionary monetary policy through sustained increases in primary surpluses and investors provide incentives for ``passive’’ fiscal policy. Second, investors’ expectations matter for inflation, and we document a Fisherian response of inflation across all maturities in response to a bond demand shock. Third, political risk is critical in the determination of bondholders’ expectations and an increase in the perceived riskiness of sovereign debt increases inflation and thus complicates the task of controlling price growth.