As the U.S. federal debt marches past $36 trillion and interest payments climb toward $1.3 trillion annually, concerns are mounting that the U.S. Treasury market — the bedrock of global finance — could become the next major source of volatility.
A Swelling Debt Load
Washington’s borrowing binge, turbocharged by pandemic spending, tax cuts, and higher interest rates, is beginning to draw scrutiny even from America’s staunchest allies. The Congressional Budget Office now projects annual deficits exceeding $2 trillion through 2030, with net interest payments becoming the largest line item in the federal budget by 2027.
The problem isn’t just the amount of debt — it’s the cost. With benchmark 10-year Treasury yields stuck near 4.4%, refinancing maturing debt is becoming substantially more expensive.
“We’ve entered a debt environment where Treasury has no room to maneuver,” says Maya Cook, head of macro strategy at Horizon Advisors. “Every auction is a test.”
Auction Wobbles and Foreign Retreat
Earlier this year, a lackluster 30-year bond auction triggered a mini sell-off in U.S. Treasuries. The bid-to-cover ratio — a key gauge of demand — dropped to 2.2, the lowest since 2021.
Foreign buyers, particularly China and Japan, have quietly trimmed their Treasury holdings. China’s stash has fallen below $800 billion, its lowest in over a decade. While Japan remains a top holder, rising yields at home are creating competition for capital.
Meanwhile, the Federal Reserve — once a massive buyer of Treasuries — is in quantitative tightening mode, letting bonds roll off its balance sheet.
Who’s Filling the Gap?
With traditional buyers pulling back, the burden has shifted toward domestic institutions and money market funds. But higher issuance volumes are straining that capacity.
The U.S. Treasury expects to issue over $1.8 trillion in net new debt in the second half of 2025 alone. Market-watchers warn that sustained issuance at this scale risks overwhelming demand — unless rates move higher still to attract marginal buyers.
Rate Cuts? Not So Fast
The Federal Reserve remains boxed in. Inflation, while down from its 2022 peak, is proving sticky. The latest CPI reading shows core inflation at 3.2%, above the Fed’s 2% target. That makes deep rate cuts unlikely in the short term.
But if the Fed doesn’t cut, debt-servicing costs will stay elevated. And if it does cut too fast, inflation expectations — and long-term bond yields — could surge anyway.
“It’s a no-win scenario for Powell,” says Marcus Elridge of Sovereign Macro Research. “Rate policy can’t fix structural fiscal problems.”
Global Confidence Under Pressure
U.S. Treasuries have long enjoyed “risk-free” status, but recent rating actions hint at erosion. Fitch downgraded U.S. debt in 2023, citing political dysfunction and long-term fiscal weakness. Moody’s has also signaled concerns.
Any further deterioration in perceived creditworthiness could push yields higher, even without Fed action — a dangerous feedback loop.
What It Means for Markets
- Equities: Higher long-term yields weigh on growth stock valuations.
- Dollar: Strength could persist as capital flows into higher-yielding U.S. assets — unless credibility cracks.
- Gold: Rising as a hedge against both inflation and fiscal instability.
- Credit Markets: Wider spreads likely as sovereign debt sets the tone for risk pricing.
Final Word
The U.S. Treasury market has long been the world’s ultimate safe haven. But with ballooning deficits, fading foreign demand, and higher-for-longer rates, it’s becoming a pressure point.
Investors should watch more than just the Fed — every Treasury auction, yield curve twist, and CBO forecast is now a critical signal.
The question isn’t whether U.S. debt is sustainable in theory. It’s whether the market is still willing — and able — to finance it in practice.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
