America’s rising debt is creating a new threat for global financial markets

The US Treasury bond yields have hit multi-decade highs, a development that historically signals negative implications for the financial markets. The 30-year U.S. Treasury yield topped 5.33% last week, a level last seen in June 2007, with the 10-year Treasury, a commonly used economic and financial benchmark, rising above 4.7%.

“To me, the recent move in long-dated U.S. Treasury yields appears to reflect more than just inflation or Federal Reserve policy expectations…. What the market is increasingly grappling with is the scale of debt that needs to be financed over the coming years I believe,” says Sneha Pandey, Fund Manager-Fixed Income, Quantum Mutual Fund.

Rising US debt has always been a concern. As of today, the US debt has reached an astounding $40 trillion, and the budget deficit has also reached alarming levels. So far this year, the US government’s debt interest burden has surpassed $1 trillion. That’s more than most countries’ entire GDP.

Despite being regarded as a “risk-free” asset backed by the US government, there has been a sell-off in US Treasury bond holdings. Lower bond prices on account of such sales have led to higher bond yields. Even the safest bet in finance is losing its shine, while gold prices are finding support.

“The conversation has gradually shifted from the cost of money to the quantity of debt. As fiscal deficits remain elevated and borrowing requirements grow, investors are demanding greater compensation to commit capital for longer periods, particularly at the long end of the yield curve,” says Pandey.

Bigger Debt, Bigger Concern

So, what’s going wrong? There isn’t a single reason to blame. Multiple factors are weakening the bond market, among them inflationary risks, anticipated higher interest rates, and a deteriorating US fiscal position.

According to the World Economic Forum, “A big investor concern is the high levels of government debt, with developed economies in particular running substantial fiscal deficits.”

But there’s a catch. Unless governments can raise more revenues, they will be forced to issue more debt, leading to a situation where investors may demand greater returns for fiscal and inflationary risks.

Here’s why it matters: Rising US debt necessitates the issuance of more bonds by the US Treasury just to service the debt, as it is running a primary deficit i.e. the government does not make enough in revenues to cover its interest burden in full, after paying off its other expenses. This leads investors to demand better compensation, which consequently drives up yields due to the increased supply of securities.

As a result, some investors are selling their existing bond holdings. That results in falling bond prices, which pushes yields higher for investors. The bond market sell-off that pushed yields to multi-decade highs demonstrates how serious the US debt situation has become.

Interest Expense on the National Debt – FYTD 2026

Source: fiscaldata.treasury.gov

Just How Deep Is America’s Fiscal Hole?

The numbers here are hard to ignore. The US spends more than it earns, and the gap is widening. The federal government has spent $1.80 trillion more than it has received so far in fiscal year (FY) 2026.

This matters because the national deficit rose by $170 billion, reaching $1.8 trillion from October 2024 to July 2025, marking a 10% increase in less than a year. The recent numbers are also alarming. The United States’ fiscal deficit increased to $432.3 billion in July, the biggest monthly sum since March 2021. The biggest in over four years.

The US’s overall national debt continues to climb and has hit $40 trillion. The United States spends more than a trillion dollars every year to service its debt. As of July 2026, servicing the debt costs $1.17 trillion, accounting for 19% of total federal spending in fiscal year 2026. Nearly one in every five dollars the US spends now goes just to interest.

Key US Debt & Bond Market Data

Source: fiscaldata.treasury.gov

Who’s actually funding the borrowing program of the US?

It is the foreign investors who largely fund the US borrowing programme. The Brookings Institution puts a number to that in its recent report. From July through December 2026, the Treasury expects to borrow more than $10 billion net every business day. And a large slice of that comes from abroad.

To fund its deficit, the U.S. Treasury borrows extensively from the global bond market, with foreign investors being the primary source of this funding.

As of mid-2025, foreign investors owned approximately 40% of U.S. Treasury securities, a decline from over 50% during the 2007–09 Global Financial Crisis, with China and Japan playing a particularly sizable role.

This is the problem area for the US. If China or Japan sells a sizeable amount of US securities, the impact is huge in the global bond market.

Treasury’s Move to Calm the Storm

And, last week’s sell-off in the bond market sent yields soaring. Someone had to step in. In an effort to bring yields lower and provide greater liquidity, the US Treasury Department intervened last week, announcing that it will double the buyback amount of longer-dated Treasury bonds from $2 billion to $4 billion per operation between September 9 and November 4. The impact was minimal, and the yields dipped a bit. As of August 25, the 30-year yield is at 5.23%, and the 10-year yield is at 4.70%.

What This Means Going Forward

Bond investors are getting wary of lending to the US government for a longer duration. They want to be paid more for waiting. That’s why 30-year bonds are seeing such high yields, as investors are asking for a higher ‘term premium,’ the extra return investors demand for lending the government money for longer.

“Investors are increasingly demanding a higher term premium rather than simply pricing higher inflation. In many ways, the bond market is signalling that fiscal sustainability, debt supply and investor demand dynamics are becoming almost as important as monetary policy in determining long-term yields,” adds Pandey.

And America isn’t alone here. Despite being the largest bond market globally, the US shares macroeconomic challenges with France, Japan, and the UK regarding high government bond yields, amid deteriorating fiscal conditions in developed economies. Bond yields in these countries are also making new highs.

Global financial markets and economies will be significantly impacted in the coming years by what influences yields and how high they grow from this point.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investment in foreign securities involves significant risks, including currency fluctuations, different financial reporting standards, and varying regulatory environments. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor. Financial Express is not responsible for any decisions made based on this information.