$40tn debt, $1.8tn deficit: Why US fiscal strain is worrying global markets

US fiscal strain is causing concern among global markets, according to research firm Jefferies. The US public debt has reached an alarming $40 trillion, while the fiscal deficit continues to expand. In July, the deficit hit $432 billion, the highest monthly deficit since March 2021 and a record for the month. Over the first ten months of the fiscal year, the deficit has already reached $1.799 trillion, surpassing the $1.775 trillion deficit recorded for the entire fiscal year of 2025.

The annualized fiscal deficit-to-GDP ratio rose to 6.1 percent in July from 5.7 percent in June. Rising Treasury yields pose a significant market risk, as Jefferies anticipates this issue to persist and put pressure on long-term Treasury yields. Nominal US GDP growth averaged 5.9 percent over the past 12 quarters, and the brokerage believes that nominal growth above the 10-year Treasury yield suggests that yields should move higher.

Recent Treasury auctions have demonstrated the mounting pressure. The 10-year Treasury auction yield reached 4.683 percent, its highest level since 2007, while the 30-year auction yield rose to 5.216 percent, its highest since 2001. Jefferies identifies the 10-year Treasury yield crossing 5 percent as a critical near-term market trigger and potential risk for equities.

The government's spending and receipts are also contributing to the fiscal strain. Federal government outlays surged 21.7 percent year-on-year in July, while receipts declined 1.3 percent. National defence spending increased by 19.9 percent during the month. Net interest and entitlement spending now account for 98.4 percent of annualized government receipts, underscoring the growing fiscal burden.