US debt tops $40 trillion as Treasury doubles bond buybacks to calm markets

Debt milestone and a market intervention

The US national debt crossed the $40 trillion mark for the first time on Tuesday, a record that arrives amid growing strain in the bond market. The Treasury responded the same day by announcing it would double its buybacks of longer-dated government bonds, a move officials framed as a liquidity measure but which some analysts viewed as a response to market pressure.

The debt figure, reported by CNBC and Euronews.com, splits into roughly $32.27 trillion held by the public and $7.78 trillion owed between government accounts, according to Euronews.com. The milestone came about two years earlier than the Congressional Budget Office projected in May 2023, when it expected the threshold to be crossed in 2028. The debt reached $39 trillion in March and $38 trillion the previous October, and the government borrowed $1.8 trillion in the first ten months of the fiscal year — more than in the whole of the previous one, as reported by Euronews.com.

The buyback plan

Starting September 9, the Treasury will double the maximum size of each buyback operation in the 10-to-20-year and 20-to-30-year markets, from $2 billion to $4 billion, running through the next quarterly refunding on November 4, according to Euronews.com. The buybacks are funded with existing cash, not new money, leaving the total debt unchanged, a point echoed by both Euronews.com and The Hindu Business Line.

The Treasury cited "strong sponsorship from market participants" for the change, Euronews.com reported. Treasury Secretary Scott Bessent, in an exclusive CNBC interview, said the Treasury could expand the operation beyond the initial $4 billion and argued that current yields don't reflect market fundamentals, citing weak liquidity particularly in the 30-year bond.

Market reaction

The announcement came as long-term yields had climbed to levels not seen in nearly two decades. The 30-year yield hit 5.3% on Monday, its highest since June 2007, according to The Hindu Business Line. Euronews.com reported that on Tuesday, the 30-year yield reached its highest level since 2007 amid what analysts called a "buyers' strike" stretching back to late June, aggravated by a swelling supply of corporate debt tied to AI data centre spending.

Yields fell after the announcement, with the 30-year dropping roughly 9 basis points and the 10-year around 6, and Wall Street rallied, Euronews.com reported. But the reprieve proved short-lived. The Hindu Business Line detailed the week's trajectory: the 10-year began at 4.69%, fell to 4.65% by Wednesday, then ended at 4.73%. The 30-year began at 5.26%, fell to 5.19%, and closed at 5.27% — both above their starting levels. CNBC reported that Bessent's remarks prompted a brief easing in yields, but the "Bessent Bid" was short-lived as the bond market resumed its march higher.

Analysts' doubts

Analysts were quick to question the effectiveness of the move. Evercore ISI said it will have "little enduring impact and could backfire," while Jefferies called it a "hastily made decision," as reported by CNBC. JPMorgan said in a client note that the "more lasting impact is the potential for higher risk premia," and JPMorgan's James Sullivan described the action on Squawk Box Asia as "a little bit like paying your mortgage with your credit card. It can work for a while, but eventually the mismatch starts to become more obvious."

Euronews.com reported that Mohamed El-Erian suggested the outsized market reaction reflected hopes of broader intervention to come rather than the direct effect of the buybacks themselves, and that Thomas Simons called the announcement "shot from the hip."

Some bond market veterans viewed the intervention as a sign of panic, The Hindu Business Line reported, and experts called the buybacks a band-aid and a way of "buying time" ahead of the mid-term elections. Peter Boockvar, CIO at OnePoint BFG Wealth Partners, said the buybacks tie the Fed's hands on interest rates, and the move appears at odds with Fed Chair Kevin Warsh's advocacy for letting economic data determine bond prices, according to The Hindu Business Line.

Fiscal backdrop and political context

The debt milestone and market turmoil unfold against a backdrop of persistent deficits. The federal budget deficit remains elevated at around 6% of GDP, The Hindu Business Line reported. Bessent, however, told CNBC there's a "very good chance" the US has seen its budget deficit peak under President Trump, and said there is "nothing magic" about the $40 trillion number, adding, "We can grow our way out of that."

President Trump, asked whether Americans should worry about the bond market volatility, simply said: "No, I don't think so," Euronews.com reported. Trump campaigned on reducing debt and deficit, set up DOGE under Elon Musk, and advocated increasing crude oil production, but a year and a half into his term, the national debt has risen by about $4 trillion, deficits show little sign of meaningful fiscal consolidation, and oil prices are higher, according to The Hindu Business Line.

David Young, president of the Conference Board's CEO Center, said "The national debt is not just a number on the government's balance sheet," Euronews.com reported. Jeffrey Gundlach, CEO of DoubleLine Capital, stated that the national debt "is no longer your grandchildren's problem. It is our problem," according to The Hindu Business Line.

Global dimensions

The bond market strain is not confined to the US. Yields have been spiking across other heavily indebted developed economies, The Hindu Business Line reported, and the waning effectiveness of government signalling is visible in Japan, where the yen strengthened to 155 to the dollar from a recent multi-decade low of 164, but has since weakened to around 159. Gold gained 5.2% during the week as investors sought alternatives, and The Hindu Business Line suggested gold is likely to remain in the spotlight.

The Hindu Business Line also noted historical precedents: past spikes in bond yields have triggered the bursting of asset bubbles and ousted world leaders, as seen with former UK Prime Minister Liz Truss. James Carville, lead strategist for former US President Bill Clinton, famously remarked that if reincarnation exists, he would want to come back as the bond market because it can intimidate everybody.

In Thursday's market wrap, CNBC reported the S&P 500 dropped 0.9%, the Nasdaq dropped 1%, and the Dow was down 1.8% week-to-date.