US bond yields have risen sharply as investors demand a higher real return for financing the federal government, placing renewed pressure on Washington to address its widening deficits. The 30-year Treasury yield closed at 5.62% on September 30, a level last seen in 2002, while the 10-year yield was close to 5.3%.
The increase has significant implications for the national debt. Interest payments reached $857 billion during the first nine months of the fiscal year, exceeding federal spending on both Medicare and national defence.
The move in the bond market has been interpreted by some as a loss of faith in the US dollar, particularly as gold has more than doubled in two years. That view suggests investors are seeking protection from an expected erosion in the value of government debt through inflation.
However, the longer-term inflation expectations implied by the Treasury market remain relatively subdued. The 30-year breakeven inflation rate, which reflects the market’s forecast for long-run inflation, is close to 2.3%.
Instead, the main shift has been in real borrowing costs. The 30-year real yield has risen above 3%, its highest level since before the 2008 financial crisis, indicating that investors are demanding more inflation-adjusted compensation to lend to the government.
US bond yields reflect competition for capital
The pressure is being driven by a combination of heavy government borrowing and increased private-sector demand for funds. The federal deficit is running at about $1.9 trillion, with larger shortfalls projected in the years ahead.
At the same time, investment linked to artificial intelligence is generating substantial borrowing needs for data centres, computer chips and electricity infrastructure. Public deficits and private investment are therefore competing for the same pool of savings, pushing up the real interest rate.
Higher real returns can reflect a growing economy when they are driven by productive investment. But elevated government borrowing risks displacing the private investment needed to improve future living standards. Rising yields also increase debt-service costs, adding to deficits and requiring further borrowing.
The Treasury’s response has so far done little to change that dynamic. In August, Treasury Secretary Scott Bessent doubled the department’s purchases of longer-term debt, covering maturities of between 10 and 30 years, after months of weak demand for bonds.
Yields initially fell after the announcement but had fully reversed within a day. The operation involved $4 billion, a relatively small amount compared with a bond market measured in trillions of dollars. Such measures may assist market liquidity, but they cannot increase the supply of savings available to the government.
Krishna Guha, Evercore’s head of economics and central bank strategy, said struggling sovereigns often resort to similar tactics, adding that the United States “is not different without limit”.
Pressure grows for spending restraint
The analysis argues that a lasting solution would require a combination of tax increases and spending reductions. But raising substantial additional revenue without widening the tax base would be difficult.
Federal tax receipts have ranged between 14.4% and 19.8% of gross domestic product over the past 60 years, with an average of 17%. Increasing taxes on the middle class could broaden the base, but such a move is politically unacceptable in the United States.
Government spending, meanwhile, has increased more consistently over the same period. The Congressional Budget Office expects spending to rise further as entitlement programmes and net interest costs grow.
With a broader tax base considered politically infeasible, much of the adjustment would have to come through spending restraint. The immediate objective would be to keep federal expenditure growing more slowly than the real economy, with modest tax increases helping to ease the process.
The bond market is now acting as the principal constraint on federal borrowing. Investors may tolerate high deficits for a time, but rising yields increase the cost of delay and can force governments into crisis-driven austerity rather than planned reform.
The signal from higher bond yields is that the US government is absorbing too much of the economy’s available capital. Debt buybacks and other short-term interventions cannot resolve that imbalance; only a more sustainable fiscal path can do so.
