US National Debt Grows, Investors Demand Higher Yields

US national debt is climbing toward a record $40 trillion, and investors are demanding higher compensation to keep lending to Washington, driving up the cost of refinancing government debt and funding future deficits.

Yields spotlight two auctions

Two Treasury auctions in the past week drew attention for their yields. The sale of 10-year notes cleared at 4.683%, the highest in 19 years, while the 30-year bond auction stopped at 5.216%, a 25-year peak.

“The overall market environment is definitely requiring Treasury to pay more to borrow,” said Zachary Griffiths, head of macro and investment-grade strategy at CreditSights in Charlotte, North Carolina. “It is more of a problem longer run if we’re going to run budget deficits of 5% to 6% of GDP. Part of that is a fiscal and inflation risk premium, among other things.”

Demand holds up despite higher rates

Treasury demand has held up even as yields rose to multi-year highs. The same forces pushing yields higher — inflation concerns, widening fiscal deficits and rising debt supply — are also boosting the compensation investors receive for holding U.S. government debt.

“The appetite for Treasuries is still there, and it’s just a matter of at what yield,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania. “The 10-year at close to 5% and the 30-year at multi-decade highs will attract more buyers for risk-free Treasuries.”

The Treasury Department did not respond to requests for comment.

A structural shift in borrowing

Long-term Treasury yields have climbed this year as investors weighed heavy borrowing, resilient economic growth, sticky inflation and uncertainty over the pace of government issuance. Investors increasingly view Washington as facing structurally large deficits rather than a temporary funding gap.

“We’ve seen a few trends that are worrying us,” said Laureline Renaud-Chatelain, fixed income strategy lead at Pictet Wealth Management, pointing to a rising term premium driven partly by high fiscal deficits. She said this would push the Treasury to keep skewing issuance toward shorter maturities.

Growing deficits and higher interest payments have pushed borrowing needs sharply higher, leading the Treasury to lean more on short-term debt, which money market funds have absorbed quickly.

Long bonds draw extra scrutiny

The 30-year auction drew particular attention because long-dated Treasuries are especially sensitive to concerns about future inflation, fiscal sustainability and debt supply. The result reflected “investor caution against long duration,” said Frances Cheung, head of FX and rates strategy at OCBC Bank in Singapore.

The 10-year auction sent a similar signal. It attracted solid participation from indirect bidders, a category that includes foreign central banks and institutional investors, but the government still had to offer a yield near 4.7% to complete the sale.

No sign of a buyers’ strike

Demand remained solid, suggesting investors are not broadly retreating from U.S. debt even as long-term borrowing costs hover near multi-decade highs. A pension fund, insurer or asset manager with long-term liabilities may find a 5.3% nominal return on a 30-year risk-free asset compelling.

Alonso Munoz, chief investment officer at Hamilton Capital Partners, noted that many Treasury buyers operate under mandates requiring them to hold government debt regardless of opportunities elsewhere.

Foreign demand remains a key focus amid recurring concerns that overseas buyers could grow less willing to finance expanding U.S. deficits, but last week’s auction metrics showed no signs of an abrupt pullback. Analysts noted that U.S. yields remain well above those in Japan and many other developed markets, giving investors an incentive to hold Treasuries.

The auction results also did not suggest so-called bond vigilantes — investors who push back against fiscal and inflation risks by demanding higher yields — are actively selling Treasuries, analysts said. Instead, the sales pointed to a market that remains well functioning but has repriced the cost of financing the federal government.

“Investors demand more to compensate for sticky inflation and large fiscal deficits,” said Ben Bennett, head of investment strategy for Asia at L&G Asset Management in Hong Kong.