The US is borrowing $2 trillion a year. The bond market is done pretending that’s fine

However, fixed income markets essentially serve as the underlying foundation for global financial conditions, influencing borrowing costs, equity valuations, and currency stability worldwide. When significant disruptions occur in US Treasuries, the ripple effects are felt across virtually every asset class.

As far as those ripple effects go, this week felt akin to the cup of water in Jurassic Park as the T-Rex approaches.

Generally speaking, US Treasuries are just about the safest possible investment - it’s not like the US government is going to default on its bills, right? Because they’re so safe, the yields are also very low. So, why did yields on 30-year US Treasury bonds hit their highest levels in almost two decades this week?

In the Q&A below, I spoke with Schroders Head of Fixed Income Kellie Wood to explore the primary drivers behind recent US treasury market developments, examine the broader implications for global markets, and highlight key tactical considerations for navigating the fixed income space today.

What is behind the big rise in US 30-year yields and what does it mean for the interest rate outlook?

Long-term Treasury yields have been climbing all year, and this week the 30-year hit its highest level since 2007 — above 5.3%. The odd part is this happened while the economy was actually showing signs of cooling: moderating inflation, weaker jobs numbers, soft retail sales. Normally that would push yields down, not up.

Investors are worried about how much the US government is borrowing. The deficit is running near $2 trillion a year, debt just crossed $40 trillion, and every big Treasury auction lately has needed to offer a higher yield to get bought — foreign buyers in particular have been pulling back. On top of that, there's a lot of corporate borrowing competing for the same pool of money, plus lingering inflation and geopolitical risk keeping a premium on long-dated debt.

The key thing to understand is this is a long-end story, not a Fed story. Short-term rates haven't moved much — this is the market demanding more compensation specifically for lending to the US government for 30 years, not a broad repricing of interest rates everywhere.

It's the clearest sign yet that Washington is uncomfortable with how high long rates have climbed, and it follows Treasury already stepping into currency markets earlier this month to support the yen.

Going forward, I'd expect this to calm things in the near term, but it doesn't fix the underlying issue — the government still has to finance a huge amount of debt. Watch the November Treasury refunding meeting for whether this becomes a longer-term strategy or was just a one-off calming move.

What does this indicate about the risks in bond and income markets, but also equities?

Before the intervention, the message was simple: investors are repricing how much risk they're willing to hold in long-dated government debt. That's a shift from viewing Treasuries as the "risk-free" anchor of a portfolio to treating them as an asset with real fiscal risk attached.

For equities, higher long yields make future earnings worth less today, which is why we saw US equities wobble alongside the bond selloff. The scarier scenario is a combined shock — weaker growth and higher inflation at the same time. Higher inflation you can argue is already priced into markets, but what isn’t is weaker growth. This would de-correlate bonds and equities.

The buyback news adds a new wrinkle: currency risk. The dollar dropped sharply the moment the announcement came out. If the government is going to lean on the bond market to keep long yields down, something else has to absorb that pressure, and right now that's looking like the dollar. So the risk hasn't gone away, it's shifted from "yields keep rising" to "the dollar weakens instead".

There's also a credibility angle worth mentioning — this is the second market intervention from the US Treasury this month, and it came as a surprise just two weeks after they'd published their regular quarterly schedule. 

That kind of ad hoc intervention can raise questions about predictability, which markets don't love either.

What do fixed income investors need to keep an eye on?

• Auction demand — how much foreign and institutional appetite shows up at upcoming Treasury auctions.
• The yield curve shape — steepening tells you this is a fiscal story, not a Fed one.
• The dollar — now a real-time signal of how markets are reacting to the buyback support.
• How the buyback program evolves — whether Treasury keeps expanding it or this was a one-off.
• The November 4 Quarterly Refunding — the next big signal on Treasury's issuance strategy.
• The deficit trajectory — this is the root cause, and the buyback news doesn't touch it.

What really matters now is growth: the Fed and Treasury need to keep growth running above the interest rate on the debt. If growth falls below that rate, the debt load stops being sustainable. This is the exact dynamic behind my 2024 Shocking Prediction on US sovereign default risk — and it's back in play.

What opportunities does this potentially open up for income investors?

• Long-dated Treasuries — yields are the highest in nearly two decades, and now Treasury itself is actively buying to support prices. Attractive for investors who can ride out some volatility along the way.
• Long-dated Australian bonds — Aussie yields move closely with US yields, so this selloff has pulled our long end up to attractive levels too. With the RBA looking done on hikes, this sets up a strong entry point to lock in high income yields in our own backyard, without taking on the currency risk of going offshore.
• AUD-hedged positions — the dollar dropped the moment the buyback news hit, which is a real cost for anyone holding unhedged US income assets. Being hedged back to AUD captures these high US yields without wearing that currency swing.
• Shorter-duration bonds — a simpler way to lock in high yields without needing to guess where long-term rates go next.
• Corporate credit — likely to keep benefiting as investors look past a shaky government bond market in search of yield.
• A barbell approach — pairing short-term safety with some long-duration exposure, so you get the benefit of today's high yields without being fully exposed to one part of the curve.

Washington has bought the bond market some breathing room, but it hasn't solved the actual problem — it's borrowing too much. If yields creep back up after this support fades, it wouldn't be a surprise. And if bonds are being propped up, the dollar may be the one that ends up paying for it.

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