The US government is facing a growing warning from bond markets as investors demand increasingly high returns to lend money to the world’s largest economy. At a recent auction of 30-year US Treasury bonds, the yield rose above five per cent, its highest level in 25 years, signalling that investors are seeking greater compensation for the risks associated with lending to the United States over the long term.
The rise has become a direct test of President Donald Trump’s economic policies, with investors showing increasing concern about the country’s borrowing requirements. Government bonds form the foundation of the global financial system, serving both as a place for major investors to park money and as a benchmark for pricing other assets, from corporate bonds to equities. Higher US Treasury yields can therefore reverberate far beyond Washington and affect financial markets internationally.
The pressure is not confined to the United States. Yields on 10-year German government bonds recently climbed to around 3.3 per cent, their highest level in roughly 15 years, increasing the cost of borrowing for Germany as well. Rising interest rates can create opportunities for investors entering the bond market because newly issued securities offer higher returns. But the same movement can hurt holders of existing bonds, whose market prices generally fall when newer securities become available with higher yields.
Several factors are contributing to the increase in yields. The Iran war has pushed oil and gas prices higher, strengthening expectations of inflation and increasing the possibility that central banks could respond with higher interest rates. At the same time, the supply of bonds is expanding. Technology companies including Alphabet and Microsoft are using capital markets to help finance the construction of their enormous data centres. Morgan Stanley estimates that global technology companies could raise around 570 billion dollars through the bond market this year to fund artificial intelligence investments.
The United States is also facing a substantial increase in its own financing needs. Government spending has risen sharply amid the Iran war, erratic tariff policy and higher healthcare costs. In mid-August, US gross debt surpassed 40 trillion dollars for the first time. Florian Heider, a financial researcher who heads the Leibniz Institute for Financial Market Research Safe in Frankfurt am Main, described the development as a “Hoppla-Moment”, saying that arguments for higher market interest rates had existed for some time but had now prevailed. He warned that the market was pricing the risk of lending to the US under Donald Trump “deutlich höher”.
The growing sensitivity of investors has revived discussion of so-called bond vigilantes, investors who sell government bonds when they regard a government’s economic or fiscal policies as too risky. The US administration has sought to calm markets by proposing increased purchases of long-term bonds. Yet yields continued to rise only hours after Treasury Secretary Scott Bessent announced the plan on 19 August. Charlie McElligott, a market strategist at Nomura, described the move as being like putting a “plaster on a gunshot wound”.
Harald Preißler, a capital markets strategist at asset manager Bantleon, described growing anxiety within the US administration. He argued that intervention itself demonstrated the seriousness of the situation. Among the possible responses are issuing more short-term debt, increasing government revenues or reducing spending. Yet higher taxes and spending cuts could prove difficult to sell to Trump’s voters. Preißler also suggested that Fed Chair Kevin Warsh could eventually intervene by buying bonds on a large scale, although the Federal Reserve’s balance sheet remains enlarged by purchases made during the last financial crisis.
Germany, despite having a debt-to-GDP ratio of 63.5 per cent compared with an almost twice-as-high ratio in the US, is also facing rising interest costs. The German government currently spends almost six per cent of its budget on debt servicing, a figure projected to exceed 12 per cent by 2030. Heider warned against taking satisfaction in America’s difficulties, arguing that if Germany’s billion-euro special fund fails to generate the expected growth, rising debt could become a greater problem for Germany than for the United States.
