US Treasury bond yields hit multi-year highs on Thursday and showed no signs of cooling off. The yield on the 10-year US Treasury bond trades over 4.93%, its highest level since October 2023, while the 30-year US Treasury bond traded around 5.29%, near multi-decade highs. Alarmingly, the 10-year note yield is nearing a 1% increase since the war in Iran began.
The Treasury steps in with a buyback plan
The Treasury Department announced on Wednesday a buyback of up to $6 billion in government debt. The Treasury raised its standard minimum buyback size from $2 billion to $4 billion, but this week’s specific operation will total $6 billion, triple the prior norm. Future operations are projected to exceed $4 billion.
Why this matters: Bond yields are rising because investors are selling them off, pushing prices down. The selling pressure stems from various reasons, each adding to the panic in the bond market.
Through the buyback mechanism, the US Treasury aims to provide liquidity and real hard cash to the banks and investors holding these bonds, while also easing their worries about bond prices crashing.
In simple words, the big message from the Treasury secretary to bond investors seems to be: “do not sell your bond holdings at any price; we are there to buy them back and won’t let this market break.”
Did investors buy the Treasury’s pitch?
Bond prices continued to fall, and yields jumped in the hours after the announcement, a sign the market wasn’t fully convinced. For the moment, at least, the bond market isn’t taking the Treasury’s pitch at face value. Bond yields have again started to rise after high PPI index numbers were released on Thursday.
What’s really driving the sell-off?
But what is behind the rise in bond yields? And why are investors not holding on to US government bonds?
The answer, to a large extent, lies in the rising US debt burden. The rise in yields is not due to any recent spike. US government bond yields have been rising for the last six years. In August 2020, the 10-year and 30-year US Treasury bond yields were 0.5% and 1.22%, respectively. Since then, they have risen steadily.
The US government debt has exceeded $40 trillion, and the interest cost itself has crossed $1.27 trillion, as of August 31.
The U.S. has carried debt almost continuously since its inception. The big shakeout was when the US government’s spending increased by over 50% between fiscal years 2019 and 2021, owing primarily to the COVID-19 pandemic. Tax cuts, stimulus programs, greater government spending, and lower tax collection due to widespread unemployment have all contributed to substantial increases in the national debt.
The Vicious Circle
To finance increased spending, the government issues a large amount of Treasury bonds. This oversupply leads to fewer buyers, prompting investors to seek higher yields due to the risks associated with holding long-term government debt.
As yields rise, the cost for the government to service its existing debt also rises, creating a wider deficit and further fiscal anxiety, leading to a cycle of increasing yields.
This situation is observed not only in the US but also in developed nations such as Japan, Germany, Italy, and France, where yields are rising due to deteriorating government debt conditions.
Why the debt-to-GDP ratio is a red flag
A country’s debt-to-GDP ratio shows how bad its fiscal situation is, revealing its ability to pay down debt. For the US, the ratio has been rising since the 1980s, and at the end of 2025, the gross debt-to-GDP ratio was 124%. Generally speaking, a higher debt-to-GDP ratio means a government will find it harder to repay its debt.
Markets appear to recognise that the US Treasury’s intervention is temporary, and future bond issuance will be necessary to address its rising debt. Investors are demanding a ‘term premium’ for holding government securities, partly reflecting concerns over fiscal health.
Oil prices are adding fuel to the fire
There’s another reason behind the surging yields. Trump’s tariffs and the Iran war have led to an oil price surge, both feeding into inflationary pressure. Brent oil has again crossed $100 and could reach its recent high of $126 if tensions escalate.
If inflation stays elevated, the US Fed would most likely hike rates to control it. Bond investors, anticipating higher rates, would likely sell their holdings to own higher-yielding bonds. The US Treasury would also likely have to offer higher coupon rates on new issuance to attract buyers.
The US producer price and consumer price inflation data are due out on Thursday and Friday, respectively. Analysts said the numbers will have a significant impact on whether the Fed raises interest rates at its September 15-16 meeting.
What this means for Indian markets
Rising US yields don’t stay confined to Wall Street; they ripple across global markets, including India’s. Sandipan Roy, CIO – Motilal Oswal Private Wealth and Market veteran, Ajay Bagga, explains the impact of rising yields for the Indian markets here.
Roy says, “When the rates go up in a market like the US, the entire world will also feel the pressure. At some point, this will have a domino effect. The mortgage prices go up, personal loan prices go up, business loans go up. This will have a domino effect at some point. Right now, it is still a supply-side pressure and not a risk perception.”
For Indian equity markets specifically, the concern is capital flight. Market veteran Ajay Bagga explains why foreign investors may start favouring US bonds over Indian stocks.
Bagga says, “US government bonds are considered risk-free assets. When their yields rise, the return differential between safe US Treasuries and riskier emerging market equities narrows. Foreign Institutional Investors (FIIs) tend to pull capital out of Indian stocks to lock in high, guaranteed dollar-denominated yields back home.”
What lies ahead?
The US Treasury’s $6 billion buyback is a drop in the ocean against a debt pile that has now crossed $40 trillion, raising doubts over whether the intervention can meaningfully calm a bond market under mounting pressure.
In a nutshell, how far the US Treasury’s intervention helps stem the bond sell-off remains to be seen. At the center of it all lies the Iran war-led oil price surge, which continues to keep inflation expectations elevated. The US debt situation isn’t going away anytime soon, and with rates staying high, the financial market landscape is set for a major shift.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are advised to consult a qualified financial advisor before making any investment decisions.