The recent violent sell-off in the U.S. bond market has raised deep concerns among senior economists. Mohamed El-Erian, former CEO of Pacific Investment Management Company, pointed out that the current surge in U.S. Treasury yields is not merely a simple cyclical market fluctuation, but a clear signal that the U.S. economy is heading towards a deeper structural turning point. This shift will not only significantly increase the operating costs of the U.S. economy itself, but its resulting chain reactions will also have more profound and lasting impacts globally.
In terms of specific market performance, despite the U.S. Treasury increasing its long-term bond buyback quota to $4 billion, the sell-off wave has not subsided. Currently, the yield on 30-year U.S. Treasuries has climbed to 5.27%, hitting its highest level since 2007. Meanwhile, yields on 5-year and 10-year Treasuries have also risen to 4.426% and 4.736%, respectively. Against the macroeconomic backdrop of the federal government's total debt surpassing the $40 trillion mark, such high borrowing costs are making the overall financing environment in the U.S. increasingly burdensome.
These elevated yields are directly translating into a massive fiscal burden. According to estimates by the Congressional Budget Office, net interest expenditure on U.S. public debt is projected to approach $963 billion by fiscal year 2026. This huge expense will become the second-largest item in the federal government's annual budget, second only to Social Security. This means nearly one-fifth of federal revenue will be used to pay debt interest, severely squeezing the funding space for other critical areas such as healthcare and national defense, and posing substantial risks to the overall operation of the country.
Exploring the root causes of this yield surge, El-Erian believes the core driver is not the runaway inflation typically feared by the market, but the rise in real yields. In a global environment full of uncertainty, investors demand higher risk premiums to hold debt assets, which essentially represents a repricing of long-term fiscal sustainability and market volatility. In addition, pressure on the bond supply side is also intensifying. In order to seize the artificial intelligence opportunity, hyperscale cloud service providers are frantically expanding data centers and issuing massive amounts of debt. Statistics from relevant agencies show that these tech giants have issued nearly $500 billion in bonds this year, with at least $300 billion more in borrowing plans before the end of the year.
Under the multiple pressures of persistently high fiscal deficits, continuously increasing Treasury issuance, and the massive financing needs of tech giants, the pressure on long-term interest rates is unlikely to dissipate in the short term. The ripples caused by the turbulence in the bond market are gradually crossing the realm of a mere interest rate cycle, spreading to U.S. fiscal health, the corporate financing ecosystem, and the overall asset pricing system.
