U.S. debt is even worse than it seems, and rising Treasury yields are now an ‘all-hands-on-deck situation,’ top economist warns

U.S. Treasury yields are surging, leading senior economist Robin Brooks to warn that the situation is more dire than it appears. In a Substack post, Brooks highlights how rising long-term yields and weaker economic data signal that demand for U.S. debt is weaker than it seems. This is a concerning trend, as the U.S. debt now stands at $40 trillion, overshadowing the AI boom as the top financial concern.

Treasury Secretary Scott Bessent has been working on buybacks to control borrowing costs, but even economic data showing weaker activity has failed to bring down long-term yields, marking a departure from historical patterns. The situation intensifies as tensions rise in the Middle East and oil prices climb, contributing to inflationary pressures.

However, the surge in government spending since the COVID-19 pandemic, coupled with the AI boom, has resulted in persistently low interest rates. This has turned the issue of unsustainable debt into a pressing question: when do governments recognize that markets have had enough? RSM Chief Economist Joseph Brusuelas suggests that the moment has arrived.

Foreign central banks and institutions that previously sought safety in Treasuries are increasingly turning to alternatives like gold. Meanwhile, hedge funds are emerging as powerful players in the market, adding volatility. To maintain investor interest, the Treasury must offer more attractive yields. As the budget deficit is projected to reach $2 trillion a year, the market is becoming increasingly wary of lending to the federal government at these levels.

Some economists interpret the rising yields as a sign of a robust economy, while others view it solely as a debt crisis. Regardless, the decoupling of yields from economic data is a cause for concern, underscoring how the market is now more focused on the federal deficit outlook.