The 10-year Treasury yield has risen above 5%, reaching its highest level since 2007 and raising concerns about the cost of servicing America’s mounting debt.
The move is well above projections from the Congressional Budget Office, which had forecast the benchmark yield at 4.1% this year and 4.2% in 2027. It expected the rate to remain around 4.3% between 2028 and 2031 before increasing to 4.4% from 2032 to 2036.
Those estimates were published in February, before the Iran war pushed up oil prices and altered expectations for inflation. An end to the conflict and a fall in energy costs could ease pressure on yields, but investors are also responding to broader economic and fiscal concerns.
The US economy is running strongly and the labour market remains tight, meaning higher yields partly reflect a return towards more normal conditions after the unusually low rates seen during the crisis era.
However, the country’s roughly $40 trillion debt pile and annual budget deficits of about $2 trillion are adding to the pressure. Other highly indebted governments and large artificial intelligence companies are also competing for bond investors’ money, forcing Treasury auctions to offer attractive yields.
Recent wars, trade tensions and natural disasters have added another risk premium. Investors increasingly view such shocks not as isolated events but as evidence of a less stable global environment.
Rising Treasury yields increase debt costs
The Committee for a Responsible Federal Budget estimates that, if yields remain more than 80 basis points above baseline projections, annual US interest payments could reach $2.7 trillion by the end of the decade.
That would be more than spending on Medicare or retirement benefits under Social Security. Maya MacGuineas, the committee’s president, warned that the resulting cycle of borrowing and interest payments could become difficult to control.
“The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility,” she said.
The 10-year yield has climbed by a full percentage point since shortly before the Iran war began in late February, and by half a percentage point in the past two months.
Ed Yardeni, the market veteran who coined the term “bond vigilantes” for investors who sell government debt in protest against large deficits, had previously argued that yields between 4% and 5% were normal for a strong US economy.
He was not initially concerned by the rise over the summer, saying there was no evidence that bond investors were rebelling. But his assessment has since shifted.
“We will worry about a debt crisis when the bond market worries about a debt crisis,” Mr Yardeni wrote. “We are starting to worry now that the 10-year US Treasury bond yield may be on the verge of breaking out above 5.00%.”
Jared Bernstein, who was chair of the Council of Economic Advisers during the Biden administration, has also adopted a more cautious position after previously opposing calls for greater budget austerity.
Writing in the New York Times, he said the combination of higher interest rates, the large deficit and the absence of political will in either party had changed the calculations.
“My point here is not to go through the relative merits of the different ways to stop digging,” he wrote. “It’s to say that even though I can’t tell you the day and time when the fire will ignite, I can tell you that we’re getting closer. And doing so at a rate that even this nonalarmist finds alarming.”
