Last week, tepid demand for a 20-year US Treasury bond auction sent yields higher, amid worries about the country’s ballooning debt burden. Yields on benchmark 10-year Treasury notes rose above the 4.5 percent mark to their highest level since February, while yields on 20- and 30-year Treasury bonds also soared past 5 percent. Investors clearly wanted more compensation to hold US government bonds.
The surge followed Moody’s cutting the US’ sovereign credit rating from “Aaa” to “Aa1” — the last of the three major ratings agencies to strip the US of its “AAA” credit rating. Meanwhile, US President Donald Trump’s administration is pushing for a bill on massive tax cuts, which could add trillions of dollars to the government’s already huge deficit.
A preliminary analysis by the US Congressional Budget Office said the tax cuts would increase the US federal deficit by US$3.8 trillion over the next decade, whereas the non-partisan Committee for a Responsible Federal Budget put the figure at about US$3.3 trillion. Regardless, the bill adds fresh concerns to the US’ already fragile fiscal sustainability.
The US debt burden — or debt-to-GDP ratio — has steadily climbed in recent years after surpassing 100 percent in 2013. The ratio is used to assess a nation’s ability to repay its debts, with a low figure suggesting an economy is producing sufficient goods and services to handle its debt obligations, while a higher number indicates the opposite.
According to Trading Economics’ global macro models, the ratio is forecast to climb from 123 percent last year to 124.4 percent by the end of this year.
US Treasury yields serve as an anchor for many asset prices and their changes reflect the overall market’s capital flows and risk preferences. Rising long-term yields reflect weakened investor confidence in the US government. They also imply downside risks for the country’s economic outlook.
The most troubling part of the market reaction is that this phenomenon is not limited to the US. Over the past week, yields on Japanese and UK bonds with longer maturities also rose to historically high levels, while those for eurozone debt moved sharply higher. Economic analysis firm Endgame Macro wrote on X on Friday that the synchronized surge in yields across global long-term bonds is more than just a routine market repricing of sovereign debt; it is an early signal of structural changes: rising inflationary expectations, a deteriorating economic outlook, failed fiscal policies and mistrust in central banks.
In short, rising yields indicate that investors are reassessing the risks of a government’s handling of fiscal discipline, which has been taking a back seat in the recurrent emergence of populism in various countries over the past few years. It remains to be seen if investors could force governments, especially the Trump administration, to bow to market pressure and exercise fiscal restraint over inflationary or irresponsible policies. There is hope, as lessons from the past show they did play a role in keeping policymakers in check.
Rising long-term yields globally carry other significant implications for investors as well. First is the reallocation of funds. When bond yields rise, it tends to attract conservative investors to move funds to the bond market, thereby reducing capital in the stock market. Rising yields in developed countries, such as Japan, could also draw funds away from emerging markets, causing stock and foreign exchange market fluctuations.
Second, it is time to shift investment focus, as rising yields mean higher borrowing costs and interest expenses for companies, especially for tech and new economy stocks that rely heavily on financing for growth. At the same time, if bond yields rise rapidly and there are no other alternative assets to mitigate risks, investors could turn their attention to stocks that pay high dividends or those in the finance industry or traditional industries that offer stable profits.
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