Debt Milestone and Fiscal Deficit

The United States has crossed a significant fiscal milestone, with its national debt rising above $40 trillion. As of August 18, the debt stood at approximately $40.05 trillion, up 7.8% from a year earlier, according to a report by brokerage firm Jefferies. This crossing came less than five months after the debt passed $39 trillion.

The federal government's deficit trajectory has steepened sharply. In July, the deficit reached $432 billion, the highest monthly figure since March 2021 and a record for that month. For the first 10 months of the current fiscal year, the cumulative deficit hit $1.799 trillion, already exceeding the full-year deficit of $1.775 trillion for fiscal 2025. The annualised deficit-to-GDP ratio also climbed to 6.1% in July, up from 5.7% in June.

Rising Treasury Yields: A Key Market Risk

Jefferies, in its latest research report, identified US fiscal deterioration as a growing concern for global markets. The brokerage said widening deficits could keep upward pressure on long-term Treasury yields, which in turn may pressure equities and constrain the Federal Reserve's policy flexibility. Jefferies strategist Christopher Wood highlighted a rise above 5% in the 10-year Treasury yield as a key market trigger that could unsettle stocks.

The yield on the 10-year note was around 4.69% after recently touching 4.746%. Recent auctions have also underscored the pressure: the 10-year auction yielded 4.683%, the highest since 2007 according to some reports, while the 30-year auction reached 5.216%, the highest since 2001. These figures were mentioned by Jefferies in the same context.

Government Spending vs. Receipts

The fiscal strain is compounded by a widening gap between spending and revenues. Total federal outlays surged 21.7% year-on-year in July, while receipts fell 1.3%. Tax receipts, including tariffs, declined 8% in July and were down over three months. National defence spending increased 19.9% during the month.

The composition of government spending has become more strained. Net interest and entitlement spending rose to 98.4% of annualised federal receivables. Interest payments have also surpassed Medicare spending in the first 10 months of fiscal 2026, becoming the second-largest federal expenditure after Social Security, according to The Times of India.

Bessent's Bond Buyback Intervention

Treasury Secretary Scott Bessent announced a sharp increase in the government's purchase of long-term treasurys, aiming to raise their price and push down yields. The move, announced last week, was seen as an attempt to contain the rise in long-term rates. However, the effect proved short-lived. Yields initially fell but soon bounced back, with the 10-year yield returning near its pre-announcement level by Friday afternoon, while the 30-year yield held near its highest levels in 20 years or more, according to a report from The Guardian.

Bessent's decision to at least double planned buybacks could help contain the rise in yields, as reported by The Tribune and The Times of India, but underlying fiscal pressures remain.

Perspectives on Bond Market

Investor Attraction: Pimco's View

Pacific Investment Management (Pimco) holds a contrasting view, arguing that current yields, while elevated, are historically attractive. In a report, Pimco executives Marc Seidner and Pramol Dhawan noted that long-term yields in the US, Europe, the UK, and Japan have climbed, but they see this as an opportunity: "We continue to view bonds as attractive and would look to add if yields continue to rise, given the opportunity higher yields present for income, carry, and rolling down a steeper yield curve." They also argue that today's yields only appear unusually high relative to the artificially suppressed rates of the post-global financial crisis era. Pimco expects the term premium on long-dated bonds to remain elevated unless there is an unexpected economic downturn. They acknowledge risks with to additional fiscal stimulus and worsening debt supply expectations.

Warnings of Crisis: Dalio and Others

Other voices are mng a far more cautionary tune. JPMorgan Chase and PGIM have warned that less predictability in Treasury debt-management could lead to higher borrowing costs. Billionaire Ray Dalio has urged investors to reduce bond holdings, warning of a possible US debt crisis within three years.

Political and Global Concerns

The Guardian's coverage highlights growing concerns among some, linking higher Treasury yields to domestic politics. President Trump has called interest rates "ridiculous" and "artificially high," and he has publicly blamed the Federal Reserve for not cutting rates. In a series of statements, he lashed out against Switzerland for having lower interest rates and even hinted at the use of force, saying "the ultimate intervention is our military". These remarks underscore how politically sensitive borrowing costs have become.

The Guardian also notes that quarterly foreign central banks have reduced their Treasury holdings, and the foreign share of Treasury debt has fallen by 10 percentage points over two decades, now around 40%. By mid-2025, private foreign investors held $7 trillion in Treasurys, almost double the $3.9 trillion held by official foreign entities. Despite this, the status of Treasury bonds as a global safe asset has persisted partly because alternatives are scarce. Meanwhile, the US debt has lost its top rating, and funding the deficit requires adding roughly $10 billion to the market every day.

Implications for Investors

For equity markets, a sustained move above the 5% 10-year yield could trigger important moves, according to Jefferies. The brokerage also noted that the fiscal backdrop could be supportive for gold, as higher yields might lure investors away from firms, but also pressure equity valuations. Special attention remains on the speed of debt accumulation and the cost of service.

In summary, the $40 trillion debt milestone, combined with a widening deficit and elevated Treasury yields, has turned attention to the sustainability of US fiscal public flows. While some firms see opportunity in higher yields, others are cautioning on the long-term risks. The coming months will likely test the ability of the Treasury, central bank, and global investors to maintain stability in a fragile bond market.