The American national debt passed the symbolic threshold of $40 trillion this week. The yields on US government bonds with a term of 30 years rose to more than 5.3 percent - the highest level since April 2007. Only a surprising intervention by the US Treasury Department on the capital market stopped the further increase, at least in the short term, and caused the yield to fall to 5.19 percent. The US national debt now corresponds to 122 percent of the US gross domestic product.
Minister Scott Bessent doubled the size of the long-dated bond buyback program. The ministry justified the intervention with the aim of improving liquidity in the market segment for long-term government bonds. But the timing of the measure and comments from US President Donald Trump suggest that it was intended to lower yields. Trump downplayed concerns about the bond market while calling for lower interest rates during a meeting with cryptocurrency industry representatives at the White House on Wednesday. “I think we have a very strong country and we are moving forward despite these ridiculously high interest rates,” the president said.
Bessent had already intervened in the market at the end of July. He took part in a support campaign for the Japanese yen and presented this as help for a geostrategically important partner: they were probably intended to slow down US bond yields. With the intervention, he prevented Japan from selling more US government bonds to support the yen and thus further boosting yields. The American tariff policy towards Japan also shows the limits of the partnership, as it has a dampening effect on the yen, as the former chief economist of the International Monetary Fund, Maurice Obstfeld, has now explained.
U.S. Treasury yields are important because they shape the terms of mortgage loans, auto loans and corporate financing, thereby influencing economic dynamics. At the same time, they are a barometer for investors' confidence in the soundness of government finances: the 30-year yield shows the interest rate investors demand in order to lend money to the US government for a very long time. If it rises despite concerns about inflation recently easing, this could indicate other fears: high budget deficits, growing debts or too large a supply of bonds.
By expanding the buyback program for long-term government bonds, Bessent is increasing the demand for these securities and thus reducing their yields. However, the program is financed on credit, namely through short-term debt instruments (treasury bills). The intervention does not change the national debt burden, which is becoming a growing problem for the USA.
The magic threshold of $40 trillion concerns gross debt. Nearly $7.7 trillion of that is in federal pension funds, Social Security trust funds and other “internal” government accounts. Ten years ago the debt was half as much. According to calculations by the Congressional Budget Office (CBO), the Treasury Department now has to pay $3 billion in interest every day to service the debt. CBO auditors recently revised the budget deficit for this fiscal year. It will be $200 billion higher than originally expected. A deficit of $2.1 trillion is now expected.
The interest burden is now the third largest budget item after spending on health care and pension insurance, ahead of the Pentagon budget. And the interest burden is the fastest growing item. Interest now consumes 19 percent of tax revenue, as Brookings budget expert Jessica Riedl calculates.
In the past three months alone, debt has increased by a trillion dollars. The tax reform with immediate write-offs for investments, the costs of the Iran war, the tariff refunds triggered by the Supreme Court and interest rates themselves are constantly darkening America's fiscal position. What is worrying about this development is that it is taking place in comparatively good economic times: with full employment, an investment boom and economic growth of almost two percent. A recession would mean lower government revenue and higher spending to support the economy - meaning Washington would have to take on even more debt.
However, it is not entirely clear which factor is driving up government bond yields. The phenomenon also affects other industrialized countries such as Japan, France and Germany. In addition to growing doubts about the determination of parliaments to make significant budget savings and lurking inflation, a “crowding-out” effect is also a possibility: Torsten Slok, chief economist at the asset manager Apollo, recently warned that the massive borrowing of large AI companies is diverting investor money from US government bonds and other credit markets. He calculates $700 billion in new AI bonds that compete with government bonds for potential investors.
Meanwhile, politicians are bracing for a partisan conflict over Congress' debt limit. It stands at $41.1 trillion and could now be exceeded in the winter. There are no signs of any parliamentary initiatives to put a stop to the rise in debt. Trump wants to increase the military budget from $1 trillion to $1.5 trillion, while the Democrats want to expand social and health care programs.
Last week, the rating agency Fitch felt compelled to confirm the rating of the United States at AA+. But the communication contained a warning: A downgrade could come if the government debt ratio or debt service costs deteriorate significantly, for example because medium-term challenges to government spending and revenue are not addressed. Alternatively, according to Fitch, a downgrade could be triggered if credibility and coherence of economic policy are lost.
